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FFTW FUNDS, INC.
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PROSPECTUS
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MAY 1, 2000
- U.S. Short-Term Portfolio
- Limited Duration Portfolio
- Mortgage-Backed Portfolio
- Global Tactical Exposure Portfolio
- Worldwide Portfolio
- Worldwide-Hedged Portfolio
- International Portfolio
- Emerging Markets Portfolio
- Inflation-Indexed Hedged Portfolio
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY PORTFOLIO'S SHARES
AS AN INVESTMENT OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
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CONTENTS
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PAGE
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Risk/Return Summary 3
Investment Objectives, Principal Investment Strategies and Investments 3
U.S. Short-Term Portfolio 3
Limited Duration Portfolio 4
Mortgage-Backed Portfolio 5
Global Tactical Exposure Portfolio 6
Worldwide Portfolio 7
Worldwide-Hedged Portfolio 8
International Portfolio 9
Emerging Markets Portfolio 10
Inflation-Indexed Hedged Portfolio 11
Principal Investment Risks 12
Risk Return Bar Charts and Tables 14
U.S. Short-Term Portfolio 14
Limited Duration Portfolio 15
Mortgage-Backed Portfolio 15
Global Tactical Exposure Portfolio 16
Worldwide Portfolio 16
Worldwide-Hedged Portfolio 17
International Portfolio 17
Emerging Markets Portfolio 18
Fee Table 20
Expenses Table Example 21
Fund Management 22
Portfolio Managers 22
Shareholder Information 24
Investment Information 30
Portfolio Turnover 40
Supplemental Investment Policies 40
Financial Highlights Tables 41
U.S. Short-Term Portfolio 41
Limited Duration Portfolio 42
Mortgage-Backed Portfolio 43
Global Tactical Exposure Portfolio 44
Worldwide Portfolio 45
Worldwide-Hedged Portfolio 46
International Portfolio 47
Emerging Markets Portfolio 48
Shareholder Inquiries 49
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2
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RISK/RETURN SUMMARY
The following is a summary of certain key information about the Portfolios,
including investment objectives, principal investment strategies and principal
investment risks. A more detailed description of the permitted investment
strategies, investments and their associated risks will follow.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND INVESTMENTS
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U.S. SHORT-TERM PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the
preservation of capital and to maintain liquidity.
PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by Standard
STRATEGIES: & Poor's Corp.("S&P"), Aa by Moody's Investor's Services, Inc. ("Moody's")
or a comparable rating, or higher from a nationally recognized statistical
rating organization) short-term debt securities. The performance objective
of the Portfolio is to outperform the Money Fund Report Averages-TM- -
All Taxable, a service of iMoneyNet, Inc. (formerly IBC Financial Data).
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MINIMUM QUALITY Thompson
RATING: S&P Moody's Bank AVERAGE
S&P: Moody's: (Short Term): (Short Term): Watch, Inc.: PORTFOLIO QUALITY:
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BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The average U.S. dollar-weighted duration generally is shorter than one
year. Except for temporary defensive purposes, the Portfolio will not have
a U.S. dollar-weighted average duration exceeding three years.
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in U.S.
dollar-denominated debt securities with a maturity of 1 to 3 years.
For temporary defensive purposes, 100% of the Portfolio's total assets
may be invested in U.S. Government securities, cash or cash equivalent
securities. These defensive strategies may prevent the Portfolio from
achieving its investment objective. The Portfolio is "diversified"
under the Investment Company Act of 1940, as amended (the "1940 Act").
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PRINCIPAL INVESTMENTS: - Asset-Backed Securities - Mortgage-Backed Securities
(See Permitted - Bank Obligations - Repurchase and Reverse Repurchase
Investment Strategies, - Corporate Debt Instruments Agreements
Investments and - U.S. Government and Agency Securities
Associated Risks for a
more detailed description)
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3
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<TABLE>
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LIMITED DURATION PORTFOLIO
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INVESTMENT OBJECTIVE: To maintain a level of total return as may be consistent with the
preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa
STRATEGIES: by Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) debt securities, using interest rate
hedging as a stabilizing technique. The performance objective of the
Portfolio is to outperform the Merrill Lynch 1-2.99 Year Treasury Index.
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MINIMUM QUALITY Thompson
RATING: S&P Moody's Bank AVERAGE
S&P: Moody's: (Short Term): (Short Term): Watch, Inc.: PORTFOLIO QUALITY:
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BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The average U.S. dollar-weighted duration generally is shorter than three
years. The average U.S. dollar-weighted duration of the Portfolio will not
differ from the average duration of the Merrill Lynch 1-2.99 Treasury
Index by more than one year. As of December 31, 1999, the duration of the
Merrill Lynch 1-2.99 Treasury Index was 1.6 years.
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in U.S.
dollar-denominated securities. For temporary defensive purposes, 100% of
the Portfolio's total assets may be invested in U.S. Government securities,
cash or cash equivalent securities. These defensive strategies may prevent
the Portfolio from achieving its investment objective. The Portfolio is
"non-diversified" under the 1940 Act.
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PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Bank Obligations
Investment Strategies, - Corporate Debt Instruments
Investments and - Mortgage-Backed Securities
Associated Risks for - Repurchase and Reverse Repurchase Agreements
a more detailed - Total Return Swaps
description) - U.S. Government and Agency Securities
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4
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<TABLE>
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MORTGAGE-BACKED PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the
preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa
STRATEGIES: by Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) mortgage-backed securities using hedging
techniques to manage interest rate and prepayment risk. The performance
objective of the Portfolio is to outperform the Lehman Brothers
Mortgage-Backed Securities Index.
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MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
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BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The average U.S. dollar-weighted duration generally will not differ from
the average duration of the Lehman Brothers Mortgage-Backed Securities
Index by more than one year. As of December 31, 1999, the duration of the
Lehman Brothers Mortgage-Backed Securities Index was 4.3 years.
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in
mortgage-backed securities of U.S. and foreign issuers. For purposes of
this Portfolio's investments, home equity loans are considered
mortgage-backed securities. For temporary defensive purposes, the Portfolio
may invest up to 100% of its total assets in U.S. Government securities,
cash or cash equivalent securities. These defensive strategies may prevent
the Portfolio from achieving its investment objective. The Portfolio is
"non-diversified" under the 1940 Act.
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PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Mortgage-Backed Securities
Investment Strategies, - Repurchase and Reverse Repurchase Agreements
Investments and - Stripped Instruments
Associated Risks for a - Total Return Swaps
more detailed - U.S. Government and Agency Securities
description)
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5
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<TABLE>
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GLOBAL TACTICAL EXPOSURE PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the
preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa
STRATEGIES: by Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) debt securities from worldwide bond
markets. The performance objective of the Portfolio is to outperform the
JP Morgan 3-Month Eurodeposit Index.
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MINIMUM QUALITY Thompson
RATING: S&P Moody's AVERAGE
S&P: Moody's: (Short Term): (Short Term): PORTFOLIO QUALITY:
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BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not
differ from the average duration of the JP Morgan 3-Month Eurodeposit
Index by more than three months.
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in debt
securities from worldwide bond markets, denominated in both U.S. dollars
and foreign currencies. The Portfolio will maintain investments in debt
securities of issuers from at least three different countries including
the U.S. At least 35% of the Portfolio's total assets will be invested in
debt securities from jurisdictions outside the U.S. For temporary
defensive purposes, 100% of the Portfolio's total assets may be invested
in U.S. Government securities, cash or cash equivalent securities. These
defensive strategies may prevent the Portfolio from achieving its
investment objective. The Portfolio will actively hedge risk through the
use of index swaps. The Portfolio is "non-diversified" under the 1940 Act.
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PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Corporate Debt Instruments
Investment Strategies, - Foreign Instruments
Investments and - Total Return Swaps
Associated Risks for a - U.S. Government and Agency Securities
more detailed
description)
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</TABLE>
6
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<TABLE>
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WORLDWIDE PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the
preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa
STRATEGIES: by Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) debt securities from worldwide bond
markets, denominated in both U.S. dollars and foreign currencies. The
performance objective of the Portfolio is to outperform the Lehman
Brothers Global Aggregate Index (Unhedged).
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MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
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BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not
differ from the average duration of the Lehman Brothers Global Aggregate
Index (Unhedged) by more than one year. As of December 31, 1999, the
duration of the Lehman Brothers Global Aggregate Index (Unhedged) was
5.06 years.
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in high
quality debt securities from worldwide bond markets, denominated in both
U.S. dollars and foreign currencies. The Portfolio will maintain
investments in debt securities of issuers from at least three different
countries including the U.S. At least 35% of the Portfolio's total assets
will be invested in debt securities from jurisdictions outside the U.S.
For temporary defensive purposes, 100% of the Portfolio's total assets
may be invested in U.S. Government securities, cash or cash equivalent
securities. These defensive strategies may prevent the Portfolio from
achieving its investment objective. The Portfolio is "non-diversified"
under the 1940 Act.
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PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Corporate Debt Instruments
Investment Strategies, - Foreign Instruments
Investments and - U.S. Government and Agency Securities
Associated Risks for a
more detailed description)
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7
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<TABLE>
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WORLDWIDE-HEDGED PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the
preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa
STRATEGIES: by Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) debt securities from worldwide bond
markets, denominated in both U.S. dollars and foreign currencies and
actively utilizes currency hedging techniques. The performance
objective of the Portfolio is to outperform the Lehman Brothers Global
Aggregate Index (Hedged).
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MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
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BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not
differ from the average duration of the Lehman Brothers Global
Aggregate Index (Hedged) by more than one year. As of December 31,
1999, the duration of the Lehman Brothers Global Aggregate Index
(Hedged) was 5.06 years.
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in high
quality debt securities from worldwide bond markets, denominated in
both U.S. dollars and foreign currencies. The Portfolio will maintain
investments in debt securities of issuers from at least three
different countries including the U.S. At least 35% of the Portfolio's
total assets will be invested in debt securities from jurisdictions
outside the U.S. As a fundamental policy, to the extent feasible, the
Portfolio will actively utilize currency hedging techniques to hedge
at least 65% of its total assets. For temporary defensive purposes,
100% of the Portfolio's total assets may be invested in U.S. Government
securities, cash or cash equivalent securities. These defensive
strategies may prevent the Portfolio from achieving its investment
objective. The Portfolio is "non-diversified" under the 1940 Act.
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PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Corporate Debt Instruments
Investment Strategies, - Foreign Instruments
Investments and - U.S. Government and Agency Securities
Associated Risks for a
more detailed
description)
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</TABLE>
8
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<TABLE>
<CAPTION>
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INTERNATIONAL PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the
preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa
STRATEGIES: by Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) debt securities from foreign bond
markets and denominated in foreign currencies. The performance
objective of the Portfolio is to outperform the JP Morgan Global
Government Bond Index (Non-U.S. Unhedged).
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MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- ------------- ------------- ------------ -----------------
BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not
differ from the average duration of the JP Morgan Global Government
Bond Index (Non-U.S. Unhedged) by more than one year. As of December
31, 1999, the duration of the JP Morgan Global Government Bond Index
(non-U.S. Unhedged) was 5.6 years.
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in high
quality debt securities from foreign bond markets, denominated in
foreign currencies. The Portfolio will maintain investments in debt
securities of issuers from at least three different countries. At
least 65% of the Portfolio's total assets will be invested in debt
securities from jurisdictions outside the U.S. For temporary defensive
purposes, 100% of the Portfolio's total assets may be invested in U.S.
Government securities, cash or cash equivalent securities. These
defensive strategies may prevent the Portfolio from achieving its
investment objective. The Portfolio is "non-diversified" under the
1940 Act.
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PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Corporate Debt Instruments
Investment Strategies, - Foreign Instruments
Investments and - U.S. Government and Agency Securities
Associated Risks for a
more detailed
description)
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</TABLE>
9
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<TABLE>
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EMERGING MARKETS PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the
preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in debt securities issued or guaranteed by
STRATEGIES: foreign governments in emerging or developing market countries denominated
primarily in foreign currencies. The performance objective of the
Portfolio is to outperform a composite index, consisting of 60% JP
Morgan Emerging Local Markets Index Plus and 40% JP Morgan Emerging
Markets Bond Index Plus. The Adviser/Sub-Adviser allocates the
Portfolio's investment assets among various emerging markets countries
(and currencies). Such allocations are not expected to be comparable
to, nor as diverse as the allocations accorded to such markets (and
currencies) by the major bond market indices. Portfolio managers will
screen out credit or default risks and highlight potentially risky
emerging market currencies by employing a fundamental economic
analysis and internally developed models.
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MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
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CCC- Caa3 A-3 P-3 LC-3 B
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DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not
differ from the average duration of the composite index of 60% JP
Morgan Emerging Local Markets Index Plus and 40% JP Morgan Emerging
Markets Bond Index Plus by more than one year. As of December 31, 1999, the
duration of the composite index has 5.3 years (the duration of the JP
Morgan Emerging Local Markets Index Plus and the JP Morgan Emerging Markets
Bond Index Plus was 0.13 years and 13 years, respectively).
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in debt
securities from bond markets in emerging countries denominated in
local currencies or currencies of OECD countries. The Portfolio will
maintain investments in debt securities of issuers from at least three
different countries. For temporary defensive purposes, 100% of the
Portfolio's total assets may be invested in U.S. Government
securities, cash or cash equivalent securities. These defensive
strategies may prevent the Portfolio from achieving its investment
objective. The Portfolio is "non-diversified" under the 1940 Act.
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PRINCIPAL INVESTMENTS: - Brady Bonds
(See Permitted - Indexed Notes, Currency Exchange-Related Securities and Similar
Investment Strategies, Securities
Investments and - Foreign Instruments
Associated Risks for - U.S. Government and Agency Securities
a more detailed
description)
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</TABLE>
10
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<TABLE>
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INFLATION-INDEXED HEDGED PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return in excess of inflation as may be
consistent with the preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in securities with a coupon rate and/or
STRATEGIES: principal amount linked to the inflation rate from worldwide bond markets,
denominated in both U.S. dollars and foreign currencies. The Portfolio
will also actively utilize currency hedging techniques. The performance
objective of the Portfolio is to outperform the Lehman Brothers Global
Real Index.
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MINIMUM QUALITY
RATING: S&P Moody's AVERAGE
S&P: Moody's: (Short Term): (Short Term): Thompson PORTFOLIO QUALITY:
---- -------- ------------- ------------- ------------ -----------------
BBB- Baa3 A-2 P-2 B AA(Aa)
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DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not
differ from the average duration of the Lehman Brothers Global Real
Index by more than one year. As of December 31, 1999, the duration of
the Lehman Brothers Global Real Index was 5 years.
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INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in
inflation-indexed securities. As a fundamental policy, the Portfolio
will attempt to hedge at least 65% of its total assets. The Portfolio
is not required to invest any minimum percentage of its assets in debt
securities of issuers located outside the U.S. nor in any minimum
number of countries or currencies. For temporary defensive purposes,
100% of the Portfolio's total assets may be invested in U.S. Government
securities, cash or cash equivalent securities. These defensive
strategies may prevent the Portfolio from achieving its investment
objective. The Portfolio is "non-diversified" under the 1940 Act.
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PRINCIPAL INVESTMENTS: - Foreign Instruments
(See Permitted - Inflation-Indexed Securities
Investment Strategies, - Illiquid Securities
Investments and - Indexed Notes, Currency Exchange-Related Securities and Similar
Associated Risks for a Securities
more detailed - U.S. Government and Agency Securities
description)
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</TABLE>
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PRINCIPAL INVESTMENT RISKS
"Risk" is the chance that you may lose money on an investment or that you will
not earn as much as you expect. The greater the risk, the greater the
possibility of losing money.
All of the Portfolios are affected by changes in the economy, or in securities
and other markets.
The possibility also exists that investment decisions of portfolio managers will
not accomplish what they are designed to achieve. No assurance can be given that
a Portfolio's investment objective will be achieved.
The Portfolios may invest in securities issued by the U.S. Government, its
agencies or sponsored enterprises. Some of these securities are backed by the
full faith and credit of the United States and others are subject to varying
degrees of risk. Investments in the U.S. Short-Term Portfolio are neither
guaranteed nor insured by the United States Government.
Investments in the Portfolios are subject to certain of the following risks. The
risks associated with each Portfolio depend on its investment strategy and the
types of securities it holds. The specific risks affecting each Portfolio are
indicated as follows:
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U.S. Global Inflation-
Short- Limited Mortgage- Tactical Worldwide- Emerging Indexed
Risks: Term Duration Backed Exposure Worldwide Hedged International Markets Hedged
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Banking industry
risk - -
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Correlation risk - - - - - - - - -
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Credit risk - - - - - - - - -
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Currency risk - - - - - -
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Foreign risk - - - - - -
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Futures risk - - - - - - - - -
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Hedging risk - - - - -
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Interest rate risk - - - - - - - - -
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Leverage risk - - - - - - - - -
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Liquidity risk - - - - - - - - -
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Market risk - - - - - - - - -
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Non-diversification
risk - - - - - - - -
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Prepayment risk - - - - - - - - -
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BANKING Investing in bank obligations will expose a Portfolio to
risks associated with the banking
INDUSTRY RISK: industry such as interest rate and credit risks.
CORRELATION RISK: Derivatives are financial instruments whose value depends
upon, or is derived from, the value of something else, such
as one or more underlying securities, indexes or currencies.
The prices of a particular derivative instrument may not
move in the same way as the underlying security or, in the
case of a hedging transaction, of the securities which are
the subject of a hedge.
CREDIT RISK: A Portfolio may be exposed to the risk that a security's
issuer or a counterparty to a contract will default or not
be able to honor a financial obligation.
CURRENCY RISK: Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. When
synthetic and cross-hedges are used, the net exposure of a
Portfolio to any one currency may be different from that of
its total assets denominated in such currency.
FOREIGN RISK: Investing in foreign securities will expose a Portfolio to
risks such as, political and economic instability, currency
devaluation and high inflation rates, which may result in
Portfolio losses and volatility. For the Emerging Markets
Portfolio, which invests in less established markets, these
risks may be increased.
FUTURES RISK: The use of futures exposes a Portfolio to the risk that the
Investment Adviser will not be able to anticipate correctly
movements in the direction of interest rates, securities
prices, and currency markets and the imperfect correlation
between the price of futures contracts and movements in the
prices of the securities being hedged.
HEDGING RISK: Hedging exposes a Portfolio to the risk that the hedge will
lose value while the hedged investment increases in value.
INTEREST RATE RISK: Investing in fixed-rate debt securities will expose a
Portfolio to the risk that the value of the Portfolio's
investments will decline if interest rates rise.
LEVERAGE RISK: The use of derivatives exposes a Portfolio to the risk of
leverage which may result in greater fluctuations in a
Portfolio's net asset value than would have occurred had
the Portfolio invested in the underlying security.
LIQUIDITY RISK: Certain securities may be difficult or impossible to sell at
favorable prices within the desired time frame.
MARKET RISK: The market value of a security may increase or decrease over
time. Such fluctuations can cause a security to be worth
less than the price originally paid for it or less than it
was worth at an earlier time. Market risk may affect a
single issuer, entire industry or the market as a whole.
NON- A non-diversified Portfolio may invest more of its assets in
DIVERSIFICATION the securities of fewer companies than a diversified
RISK: Portfolio. This vulnerability to factors affecting a single
investment can result in greater Portfolio losses and
volatility.
PREPAYMENT RISK: A Portfolio that invests in mortgage-backed and other
asset-backed securities is exposed to the risk that such
securities may repay principal either faster or slower than
expected.
13
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RISK/RETURN BAR CHARTS AND TABLES
The following charts and tables give some indication of the risks of
investing in the Portfolios. These charts and tables illustrate the changes
in each Portfolio's yearly performance and show how each Portfolio's average
returns for 1, 5 and 10 years (or since inception if a Portfolio has not been
in existence for 10 years) compare with a selected index. Past performance is
not necessarily an indication of how a Portfolio will perform in the future.
The Inflation-Indexed Hedged Portfolio had not commenced operations as of
December 31, 1999 and therefore has no performance information to report.
U.S. SHORT-TERM PORTFOLIO
ANNUAL TOTAL RETURN
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.51% 6.40% 3.45% 2.89% 3.71% 5.71% 5.45% 5.09% 5.59% 4.26%
</TABLE>
During the ten-year period shown in the U.S. Short Term Portfolio's bar chart,
the highest quarterly return was 2.22% (quarter ending 12/31/90) and the lowest
quarterly return was 0.55% (quarter ending 12/31/93).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
14
<PAGE>
LIMITED DURATION PORTFOLIO
ANNUAL TOTAL RETURN
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
0.29% 11.26% 5.29% 7.21% 6.79% 2.88%
</TABLE>
During the six-year period shown in the Limited Duration Portfolio's bar chart,
the highest quarterly return was 3.53% (quarter ending 3/31/95) and the lowest
quarterly return was -0.47% (quarter ending 3/31/94).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
MORTGAGE-BACKED PORTFOLIO
ANNUAL TOTAL RETURN
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
10.19% 7.42% 1.21%
</TABLE>
During the three-year period shown in the Mortgage-Backed Portfolio's bar chart,
the highest quarterly return was 3.97% (quarter ending 6/30/97) and the lowest
quarterly return was -1.10% (quarter ending 6/30/99).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
15
<PAGE>
GLOBAL TACTICAL EXPOSURE PORTFOLIO
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C>
3.18% 8.77% 8.20% 2.90%
</TABLE>
During the four-year period shown in the Global Tactical Exposure Portfolio's
bar chart, the highest quarterly return was 3.86% (quarter ending 3/31/97) and
the lowest quarterly return was -0.41% (quarter ending 3/31/96).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
WORLDWIDE PORTFOLIO
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
15.86% (2.25%) 12.60% 5.77% 2.93% 15.58% (5.38%)
</TABLE>
During the seven-year period shown in the Worldwide Portfolio's bar chart, the
highest quarterly return was 8.85% (quarter ending 9/30/98) and the lowest
quarterly return was -3.75% (quarter ending 3/31/94).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
16
<PAGE>
WORLDWIDE-HEDGED PORTFOLIO
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
12.89% 7.84% 11.00% 10.03% 12.60% 11.53% (0.19%)
</TABLE>
During the seven-year period shown in the Worldwide-Hedged Portfolio's bar
chart, the highest quarterly return was 10.46% (quarter ending 9/30/94) and the
lowest quarterly return was -3.98% (quarter ending 3/31/94).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
INTERNATIONAL PORTFOLIO
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
(0.43%) 18.35% (6.34%)
</TABLE>
During the three-year period shown in the International Portfolio's bar chart,
the highest quarterly return was 10.42% (quarter ending 9/30/98) and the lowest
quarterly return was -5.28% (quarter ending 3/31/99).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
17
<PAGE>
EMERGING MARKETS PORTFOLIO
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1998 1999
<S> <C>
(10.50%) 11.73%
</TABLE>
During the two-year period shown in the Emerging Markets Portfolio's bar chart,
the highest quarterly return was 18.47% (quarter ending 12/31/98) and the lowest
quarterly return was -23.47% (quarter ending 9/30/98).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
18
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PAST PAST PAST SINCE
(FOR THE PERIODS ENDING DECEMBER 31, 1999) 1 YEAR 5 YEARS 10 YEARS INCEPTION*
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Short-Term Portfolio 4.26% 5.22% 5.10% 5.12%
- - ------------------------------------------------------------------------------------------------------------------------
Money Fund Report Averages-TM--All Taxable 4.64% 5.04% 4.85% 4.87%
- - ------------------------------------------------------------------------------------------------------------------------
Limited Duration Portfolio 2.88% 6.64% N/A 5.46%
- - ------------------------------------------------------------------------------------------------------------------------
Merrill Lynch 1-2.99 Year Treasury Index 3.06% 6.50% N/A 5.41%
- - ------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Portfolio 1.21% N/A N/A 6.87%
- - ------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Mortgage-Backed
Securities Index 1.85% N/A N/A 6.53%
- - ------------------------------------------------------------------------------------------------------------------------
Global Tactical Exposure Portfolio 2.90% N/A N/A 6.24%
- - ------------------------------------------------------------------------------------------------------------------------
JP Morgan 3 Month Eurodeposit Index 5.58% N/A N/A 5.82%
- - ------------------------------------------------------------------------------------------------------------------------
Worldwide Portfolio** -5.38% 6.03% N/A 6.82%
- - ------------------------------------------------------------------------------------------------------------------------
JP Morgan Global Government Bond
Index (Unhedged) -5.07% 6.69% N/A 6.96%
- - ------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Global Aggregate
Index (Unhedged) -5.21% N/A N/A N/A
- - ------------------------------------------------------------------------------------------------------------------------
Worldwide-Hedged Portfolio** -0.19% 8.88% N/A 9.32%
- - ------------------------------------------------------------------------------------------------------------------------
JP Morgan Global Government Bond
Index (Hedged)*** 0.73% 9.77% N/A 8.05%
- - ------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Global Aggregate
Index (Hedged) 0.79% N/A N/A N/A
- - ------------------------------------------------------------------------------------------------------------------------
International Portfolio -6.34% N/A N/A 4.58%
- - ------------------------------------------------------------------------------------------------------------------------
JP Morgan Global Government Bond Index
(Non-US Unhedged) -6.18% N/A N/A 3.73%
- - ------------------------------------------------------------------------------------------------------------------------
Emerging Markets Portfolio 11.73% N/A N/A -0.51%
- - ------------------------------------------------------------------------------------------------------------------------
JP Morgan Emerging Local Markets Index Plus 12.47% N/A N/A 8.65%
- - ------------------------------------------------------------------------------------------------------------------------
JP Morgan Emerging Markets Bond Index Plus 25.97% N/A N/A 2.68%
- - ------------------------------------------------------------------------------------------------------------------------
Constructed Benchmark
(Consisting of 60% JP Morgan Emerging Local
Markets Index Plus and 40% JP Morgan
Emerging Markets Bond Index Plus) 17.89% N/A N/A 6.86%
- - ------------------------------------------------------------------------------------------------------------------------
Inflation-Indexed Hedged N/A N/A N/A N/A
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Portfolio Inception Dates:
1. U.S. Short Term Portfolio: 12/6/89
2. Limited Duration Portfolio: 7/26/93
3. Mortgage Backed Portfolio: 4/29/96
4. Global Tactical Exposure Portfolio: 3/25/93. The Portfolio was fully
liquidated on 12/30/94, and recommenced operations on 9/14/95.
5. Worldwide Portfolio: 4/15/92
6. Worldwide-Hedged Portfolio: 5/19/92
7. International Portfolio: 5/9/96
8. Emerging Markets Portfolio: 8/12/97
9. Inflation-Indexed Hedged Portfolio: The Portfolio had not commenced
operations as of December 31, 1999.
**Effective March 31, 2000, the Portfolios changed their performance benchmark
index to Lehman Brothers Global Aggregate Index (Unhedged for the Worldwide
Portfolio and Hedged for the Worldwide-Hedge Portfolio) because the new indexes
better reflect the relative weighting of U.S. and Japanese securities, and
government and non-government securities, in each Portfolio. The Lehman Brothers
Global Aggregate Index commenced January 31, 1999.
***Performance for this benchmark is shown from 5/19/92 until 7/31/94 and
from 7/1/95 to 12/31/99. The IBC's Money Fund Report Averages-TM- - all
taxable is used from 8/1/94 through 6/30/95. For the period between 8/1/94
and 6/30/95, the Worldwide-Hedged Portfolio was invested in cash or
short-term instruments due to its small size. Consequently, the Portfolio's
performance is compared to this constructed benchmark.
19
<PAGE>
FEE TABLE
This Table describes the fees and expenses that you may pay if you buy and hold
shares of a Portfolio.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
U.S. Global Inflation-*
Short- Limited Mortgage- Tactical Worldwide- Emerging Indexed
Term Duration Backed Exposure Worldwide Hedged International Markets Hedged
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Fees
(Fees Paid
Directly From
Your Investment) None None None None None None None None None
- - --------------------------------------------------------------------------------------------------------------------------------
Annual Fund
Operating
Expenses
(Expenses that
are Deducted
From Fund
Assets)
- - --------------------------------------------------------------------------------------------------------------------------------
Management Fees 0.30% 0.35% 0.30% 0.40% 0.40% 0.40% 0.40% 0.75% 0.40%
- - --------------------------------------------------------------------------------------------------------------------------------
Distribution Fees
(12b-1) None None None None None None None None None
- - --------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.13% 0.19% 0.14% 0.18% 0.23% 0.19% 0.20% 0.26% 0.15%
- - --------------------------------------------------------------------------------------------------------------------------------
Total Annual
Fund Operating
Expenses 0.43% 0.54% 0.44% 0.58% 0.63% 0.59% 0.60% 1.01% 0.55%
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inflation-Indexed Hedged Portfolio had not commenced operations as of the
date of this prospectus. "Other Expenses" have been estimated.
Pursuant to the U.S. Short-Term Portfolio's Investment Advisory Agreement, the
Total Operating Expenses of the Portfolio are capped at 0.40% (on an annualized
basis) of that Portfolio's average daily net assets. In addition, for each
Portfolio, the Investment Adviser and Investors Capital (the "Administrator")
have voluntarily agreed to cap the Net Operating Expenses of a Portfolio at a
percentage (on an annualized basis) of that Portfolio's average daily net assets
as set forth in the table below. All operating expenses exceeding caps and
voluntary waiver of fees will be paid by the Investment Adviser or the
Administrator, as applicable. The Investment Adviser and the Administrator will
not attempt to recover prior period waivers should expenses fall below the cap.
For the fiscal year ended 12/31/99, the table shows the total amount of the fees
waived by the Investment Adviser and Administrator. Under Administration
Agreements effective May 29, 1998, between the Portfolios and the Administrator,
the Administrator provides administrative services to each Portfolio for an
administrative fee and an incentive fee. The incentive fee is paid to the
Administrator in the event any Portfolio operates below its expense ratio. This
incentive fee is capped at 0.02% of such Portfolio's average daily net assets.
Under an agreement between the Investment Adviser and Investors Capital,
Investors Capital is currently voluntarily waiving up to 0.02% on the first $350
million of U.S. Short-Term Portfolio's assets. Such waivers can be terminated
at any time.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
U.S. Global Inflation-*
Short- Limited Mortgage- Tactical Worldwide- Emerging Indexed
PORTFOLIO NAME Term Duration Backed Exposure Worldwide Hedged International Markets Hedged
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Waived Fees 0.18% 0.24% 0.19% 0.28% 0.03% 0.14% 0.00%** None 0.20%***
- - --------------------------------------------------------------------------------------------------------------------------------
Net Operating
Expenses Cap 0.25% 0.30% 0.25% 0.30% 0.60% 0.45% 0.60% 1.50% 0.35%
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Round to less than .01%
*** Estimated
20
<PAGE>
EXPENSES TABLE EXAMPLE
The following table is intended to help you compare the cost of investing in the
Portfolios with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that each Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Short-Term $44 $138 $241 $543
- - --------------------------------------------------------------------------------------------------------------
Limited Duration $55 $173 $302 $678
- - --------------------------------------------------------------------------------------------------------------
Mortgage-Backed $45 $141 $246 $553
- - --------------------------------------------------------------------------------------------------------------
Global Tactical Exposure $59 $186 $323 $725
- - --------------------------------------------------------------------------------------------------------------
Worldwide $64 $201 $350 $786
- - --------------------------------------------------------------------------------------------------------------
Worldwide-Hedged $60 $189 $330 $739
- - --------------------------------------------------------------------------------------------------------------
International $61 $192 $335 $750
- - --------------------------------------------------------------------------------------------------------------
Emerging Markets $103 $321 $557 $1,234
- - --------------------------------------------------------------------------------------------------------------
Inflation-Indexed Hedged* $56 $176 N/A N/A
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
* Portfolio has not commenced investment operations, therefore only fees for one
and three years are presented.
21
<PAGE>
FUND MANAGEMENT
BOARD OF DIRECTORS
The Board of Directors of FFTW Funds, Inc. (the "Fund"), is responsible for
the overall management and supervision of the Portfolios, which are series of
the Fund. The Fund's Directors are Stephen P. Casper, John C Head III,
Lawrence B. Krause, Andrea Redmond, Saul H. Hymans and Onder John Olcay.
Additional information about the Directors and the Fund's executive officers
may be found in the Statement of Additional Information under the heading
"Management of the Fund."
INVESTMENT ADVISER
Subject to the direction and authority of the Board of Directors, Fischer
Francis Trees & Watts, Inc. ("FFTW" or the "Investment Adviser"), serves as
Investment Adviser to the Portfolios. The Investment Adviser continuously
conducts investment research and is responsible for the purchase, sale or
exchange of the Portfolios' assets. Organized in 1972, the Investment Adviser
is registered with the Securities and Exchange Commission and is a New York
corporation that, with its affiliated companies, currently manages
approximately $30 billion in assets for numerous fixed-income portfolios. The
Investment Adviser currently advises over 125 major institutional clients
including banks, central banks, pension funds and other institutional
clients. The average size of a client relationship with the Investment
Adviser is in excess of $200 million. The Investment Adviser also serves as
the sub-adviser to three portfolios of two other open-end management
investment companies. The Investment Adviser's offices are located at 200
Park Avenue, New York, New York 10166. The Investment Adviser is directly
wholly-owned by Charter Atlantic Corporation, a New York corporation. Each
Portfolio paid the Investment Adviser for its services in the twelve months
ended December 31, 1999, at the annual percentage rate described below, based
on each Portfolio's average daily net assets.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
PORTFOLIO NAME MANAGEMENT FEE RATES*
--------------------------------------------------------------------
<S> <C>
U.S. Short-Term 0.15%
--------------------------------------------------------------------
Limited Duration 0.15%
--------------------------------------------------------------------
Mortgage-Backed 0.10%
--------------------------------------------------------------------
Global Tactical Exposure 0.10%
--------------------------------------------------------------------
Worldwide 0.40%
--------------------------------------------------------------------
Worldwide-Hedged 0.26%
--------------------------------------------------------------------
International 0.40%
--------------------------------------------------------------------
Emerging Markets 0.75%
--------------------------------------------------------------------
</TABLE>
* Management fees for all Portfolios except the Emerging Markets Portfolio show
Management Fee Rates paid after the waiver of fees.
When the Inflation-Indexed Hedged Portfolio commences operations, it will pay
the Investment Adviser at an annualized rate of 0.40% (0.20% after waiver of
fees) of the Portfolio's average daily net assets.
INVESTMENT SUB-ADVISER
Fischer Francis Trees & Watts, a corporate partnership organized under the
laws of the United Kingdom and an affiliate of the Investment Adviser, serves
as Sub-Adviser to the Global Tactical Exposure, Worldwide, Worldwide-Hedged,
International, Emerging Markets and Inflation-Indexed Hedged Portfolios.
Organized in 1989, the Sub-Adviser is a U.S.-registered investment adviser
and currently manages approximately $7.5 billion in multi-currency
fixed-income portfolios for institutional clients. The Investment Adviser
pays the Sub-Adviser monthly from its advisory fee. The Sub-Adviser's annual
fee is equal to the advisory fee for each of the Global Tactical Exposure,
Worldwide, Worldwide-Hedged, International, Emerging Markets and
Inflation-Indexed Hedged Portfolios. The Sub-Adviser's offices are located at
3 Royal Court, The Royal Exchange, London, EC 3V 3RA. The Sub-Adviser is
directly and indirectly wholly-owned by Charter Atlantic Corporation, a New
York corporation.
PORTFOLIO MANAGERS
FFTW uses a team approach for making the strategic and sector allocations within
each of its model portfolios. For each Portfolio, a specific portfolio manager
is responsible for portfolio implementation and compliance with
Portfolio-specific and FFTW-wide investment strategy. The portfolio manager
determines the broad risk parameters under which a Portfolio operates, but
relies on specialist investment teams for the generation of ideas and specific
investments in
22
<PAGE>
a Portfolio. The following groups and teams assist in the selection of specific
investments, subject to each Portfolio's investment policies and restrictions:
the Duration, Country and Foreign Exchange Strategy Group, consisting of the
Foreign Exchange, U.S. Bloc, Europe and Japan teams, and the Sector Allocation
Strategy Group, consisting of the Global Credit, Mortgages and Emerging Markets
teams.
ADNAN AKANT, MANAGING DIRECTOR. Mr. Akant is responsible for management of
the Inflation-Indexed Hedged Portfolio. He joined FFTW in 1984 after six
years with the World Bank, where he served as a project financial analyst in
Europe and the Middle East area before joining the treasurer's staff as an
investment officer. As a member of the investment department at the World
Bank, Mr. Akant was responsible for investment and trading of each of the
major sectors of the bank's actively managed liquidity portfolio. He was also
a member of the investment strategy committee and shared responsibility for
formulating and implementing the bank's trading and investment strategy. Mr.
Akant was later promoted to senior investment officer, and was the division's
deputy in charge of the U.S. dollar portfolio. Mr. Akant holds a Ph.D. in
systems science, an MS in finance and international management, an Engineer's
degree and MS and BS degrees in electrical engineering, all from the
Massachusetts Institute of Technology. Mr. Akant also taught graduate and
undergraduate level courses as a teaching assistant. Mr. Akant is a member of
the New York Academy of Sciences, IEEE, and of the Sigma XI, Tau Beta Pi, and
Eta Kappa Nu honor societies.
ANDREW M. HEADLEY, PORTFOLIO MANAGER. Mr. Headley is responsible for
management of the Mortgage-Backed Portfolio. Mr. Headley joined FFTW in 1994.
Prior to May 1996, Mr. Headley was a client service and business development
analyst. Currently, his primary focus is on the mortgage pass-through market
and those portfolios which are benchmarked against a mortgage pass-through
index. Mr. Headley holds a B.A. SUMMA CUM LAUDE in finance (1994) from the
Wharton School of the University of Pennsylvania.
JEFFREY HOLTMAN, PORTFOLIO MANAGER. Mr. Holtman is responsible for management
of the U.S. Short-Term and Limited Duration Portfolios of the FFTW Funds,
Inc. Mr. Holtman joined FFTW in May 1996 after two years with J.P. Morgan as
a credit risk analyst. Currently, he manages all domestic asset-backed
securities and is also responsible for short-intermediate duration
portfolios. Mr. Holtman received a B.S. in Industrial Management and
Economics from Carnegie Mellon University (1994).
SIMON LUE-FONG, PORTFOLIO MANAGER. Mr. Lue-Fong is responsible for management
of the Emerging Markets Portfolio. He joined FFTW in 1994, and is currently
in charge of the European bloc interest rate decisions for their global
portfolios. After focusing on European interest rates for four years, Simon
is now one of three portfolio managers responsible for foreign exchange
positions in major economies. Mr. Lue-Fong has a B.A. in Finance from
Bournemouth University.
STEWART M. RUSSELL, MANAGING DIRECTOR. Mr. Russell is responsible for
management of the Worldwide, Worldwide-Hedged, International and Global
Tactical Exposure Portfolios of FFTW Funds, Inc. Mr. Russell joined FFTW in
1992 from the short-term proprietary trading desk in the global markets area
of J.P. Morgan, where he was responsible for proprietary positioning of U.S.
and non-U.S. government obligations, corporate bonds, and asset-backed
securities. Prior to that, Mr. Russell managed J.P. Morgan's short-term
interest rate risk group, coordinating a $10 billion book of assets and
liabilities. Mr. Russell holds a B.A. in government from Cornell University
and an M.B.A. in finance from New York University.
23
<PAGE>
SHAREHOLDER INFORMATION
PURCHASES
Portfolio shares may be purchased directly from the Portfolio, or obtained by
employing the services of an outside broker or agent. Such broker or agent may
charge a fee for its services. The minimum initial investment in any Portfolio,
if shares are purchased directly from the Portfolio, is $100,000; such minimum
may be waived at the discretion of FFTW or First Fund Distributors, Inc. ("First
Fund or "the Distributor"). Subsequent investments or redemptions may be of any
amount. Initial investments, if obtained through a broker or agent may be for
amounts lower than $100,000. There are no loads or 12b-1 distribution fees
imposed by the Portfolio. Shares purchased will begin accruing dividends on the
day Federal funds are received.
Purchases of shares of all the Portfolios, except U.S. Short-Term Portfolio, may
be made on any "Business Day," meaning any Monday through Friday that the New
York Stock Exchange is open. At the present time, the New York Stock Exchange is
closed on: New Year's Day, Dr. Martin Luther King's Birthday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas. Purchases of shares of U.S. Short-Term Portfolio may be made on any
"Business Day" meaning Monday through Friday with the exception of the holidays
declared by the Federal Reserve Banks of New York or Boston. At the present
time, these holidays are: New Year's Day, Dr. Martin Luther King's Birthday,
Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving, and Christmas.
WIRING INSTRUCTIONS
To: Investors Bank & Trust Company, Boston, Massachusetts.
ABA Number: 011001438
Account Name: First Fund Distributors, Inc. - Fund Purchase Account
Account Number: 933333333
Reference: (Indicate Portfolio name)
24
<PAGE>
TO PURCHASE SHARES
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
WHEN NET ASSET WHEN & HOW
VALUE (NAV) SHARES MAY BE PROCEDURE FOR SAME DAY RESULT OF LATE NOTIFICATION OR
PORTFOLIO NAME IS DETERMINED PURCHASED PURCHASES DELAY IN RECEIPT OF FUNDS
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - - U.S. SHORT- - All Business - Any Business - Purchasers must call - The Portfolio must
TERM Days Day Investors Capital at receive notice
- - - LIMITED (800) 762-4848 or before 4 p.m. (wire
DURATION - Submitted orders (212) 332-5211 if may be received
- - - WORLDWIDE must include a within the City of after 4 p.m. ET) for
- - - WORLDWIDE- completed account New York or shares to be bought
HEDGED application. Investors Bank at at that day's price.
- - - INTERNATIONAl (800) 247-0473 prior
- - - INFLATION- - Federal funds must to 4:00 p.m. ET to - Shares will be
INDEXED be wired to First inform the Portfolio bought at the next
HEDGED Fund's "Fund Purchase of the incoming wire business day's price
Account" at Investors transfer. if wire is received
Bank & Trust Company. after 4:00 p.m. ET
- Purchasers must and no notice is
indicate which given.
Portfolio is to be
purchased.
- If Federal funds are
received by the
Portfolio that day,
the order will be
effective that day.
Price of shares is
based on the next
calculation of NAV
after the order is
placed.
- - -----------------------------------------------------------------------------------------------------------------------------------
- - - GLOBAL TACTICAL - Last Business Day - Last Business Day - Purchasers must call - The Portfolio must
EXPOSURE of each month or on of each month or on Investors Capital at receive notice
- - - EMERGING any other Business Days any other Business Days (800) 762-4848 or before 4 p.m. (wire
MARKETS approved by the approved by the (212) 332-5211 if may be received
- - - MORTGAGE- Investment Adviser. Investment Adviser. within the City of after 4 p.m. ET) for
BACKED New York or shares to be bought
- Submitted orders must Investors Bank at at that day's price.
include a completed (800) 247-0473 prior
account application. to 4:00 p.m. ET to - Shares will be
inform the Portfolio bought at the next
- Federal funds must of the incoming wire business day's price
be wired to First transfer. if wire is received
Fund's "Fund after 4:00 p.m. ET
Purchase Account" at - Purchasers must and no notice is
Investors Bank & indicate which given.
Trust Company. Portfolio is to be
purchased.
- If Federal funds are
received by the
Portfolio that day,
the order will be
effective that day.
Price of shares is
based on the next
calculation of NAV
after the order is
placed.
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
REDEMPTIONS
All Portfolio shares (fractional and full) will be redeemed upon shareholder
request. The redemption price will be the next net asset value per share,
determined after the Transfer Agent receives proper notice of redemption (see
table below). Shares redeemed receive dividends declared up to, and including
the day preceding the day of the redemption payment.
Shares may be redeemed by employing the services of an outside broker or agent
or may be redeemed directly from the Portfolio. Such broker or agent may charge
a fee for its services. There are no loads or 12b-1 distribution fees imposed by
the Portfolio. No charge is imposed by the Portfolio to redeem shares, however,
a shareholder's bank may impose its own wire transfer fee for receipt of the
wire. The Portfolio may execute redemptions in any amount requested by the
shareholder up to the amount the shareholder has invested in the Portfolio.
A shareholder may change its authorized agent or the account designated to
receive redemption proceeds at any time by writing to the Transfer Agent with an
appropriate signature guarantee. Further documentation may be required when
deemed appropriate by the Transfer Agent.
A telephone redemption option is made available to shareholders on the
Portfolio's Account Application. The Portfolio or the Transfer Agent may employ
procedures designed to confirm that instructions communicated by telephone are
genuine. If the Portfolio does not employ such procedures, it may be liable for
losses due to unauthorized or fraudulent instructions. The Portfolio or the
Transfer Agent may require personal identification codes and will only wire
funds through pre-existing bank account instructions. No bank instruction
changes will be accepted via telephone.
In an attempt to reduce expenses, the Portfolio may redeem shares of any
shareholder whose Portfolio account has a net asset value lower than $100,000. A
shareholder's account may be involuntarily redeemed should the account value
fall below minimum investment requirements. An involuntary redemption will not
occur when drops in investment value are the sole result of adverse market
conditions. The Portfolio will give 60 days prior written notice to shareholders
whose shares are being redeemed to allow them to purchase sufficient additional
shares of the applicable Portfolio to avoid such redemption. The Portfolio also
may redeem shares in a shareholder's account as reimbursement for loss due to
the failure of a check or wire to clear in payment of shares purchased.
TO REDEEM SHARES
<TABLE>
<S><C>
- - -----------------------------------------------------------------------------------------------------------------------------------
1. SHAREHOLDERS MUST PROVIDE THE FOLLOWING INFORMATION:
a. The dollar or share amount to be redeemed;
b. The account to which the redemption proceeds should be wired (this account will have been previously designated by the
shareholder on its Account Application Form);
c. The name of the shareholder; and
d. The shareholder's account number
2. SHAREHOLDERS SHOULD CALL THE TRANSFER AGENT AT (800) 247-0473 OR INVESTORS CAPITAL SERVICES AT (800) 762-4848 TO REQUEST A
REDEMPTION.
3. IN THE CASE OF FOREIGN EXCHANGES, A PORTFOLIO'S NAV MAY CHANGE WHEN SHAREHOLDERS CANNOT BUY OR SELL SHARES.
- - -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME WHEN REDEMPTION EFFECTIVE RESULT OF LATE NOTIFICATION OF REDEMPTION
- - -----------------------------------------------------------------------------------------------------------------------------------
- - - U.S. Short-Term If notice is received by the Transfer Agent If notice is received by the Transfer Agent on a
- - - Limited Duration by 4:00 p.m. ET on any Business Day, the redemption non-business day or after 4:00 p.m. ET on a
- - - Mortgage-Backed will be effective and payment will be made within Business Day, the redemption notice will be
- - - Global Tactical Exposure seven calendar days, but generally two business deemed received as of the next Business Day.
- - - Worldwide days following receipt of such notice. Price of
- - - Worldwide-Hedged shares is based on the next calculation of the NAV
- - - International after the order is placed.
- - - Emerging Markets
- - - Inflation-Indexed Hedged
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
PRICING OF PORTFOLIO SHARES
Your price for Portfolio shares is the Portfolio's net asset value per share.
Portfolio net asset value is calculated by: (1) adding the market value of all
the Portfolio's assets, (2) subtracting all of the Portfolio's liabilities, and
then (3) dividing by the number of shares outstanding and adjusting to the
nearest cent.
1. For all Portfolios other than Mortgage-Backed, Emerging Markets and Global
Tactical Exposure, net asset value is calculated by the Portfolios'
Accounting Agent as of 4:00 p.m. ET on each Business Day.
2. The Mortgage-Backed, Emerging Markets, and Global Tactical Exposure
Portfolios' net asset values are calculated by the Portfolios' Accounting
Agent as of 4:00 p.m. ET on the last Business Day of each month, on any
other Business Days in which the Investment Adviser approves a purchase,
and on each Business Day for which a redemption order has been placed.
All Portfolio investments are valued daily at their market price, which
results in unrealized gains or losses. Readily marketable fixed-income
securities are valued on the basis of prices provided by a pricing service
when such prices are believed by the Investment Advisor to reflect the fair
value of such securities. Securities traded on an exchange are valued at
their last sales price on that exchange. Securities and other financial
instruments for which over-the-counter market quotations are available are
valued at the latest bid price (asked price for short sales). Time deposits
and repurchase agreements are generally valued at their cost plus accrued
interest. Securities for which market quotations are not readily available
will be valued in good faith by methods approved by the Board of Directors.
Securities with maturities less than 60 days are valued at amortized cost,
which approximates market value, unless this method does not represent fair
value.
DIVIDENDS
If desired, shareholders must request to receive dividends in cash (payable
on the first business day of the following month) on the Account Application
Form. Absent such notice, all dividends will be automatically reinvested in
additional shares on the last Business Day of each month at the share's net
asset value. In the event that a Portfolio realizes net short- or long-term
capital gains (i.e., with respect to assets held more than one year), the
Portfolio will distribute such gains by automatically reinvesting (unless a
shareholder has elected to receive cash) them in additional Portfolio shares.
Net investment income (including accrued but unpaid interest, amortization of
original issue and market discount or premium) of each Portfolio, other than
Mortgage-Backed, Emerging Markets and Global Tactical Exposure Portfolios will
be declared as a dividend payable daily to the respective shareholders of record
as of the close of each Business Day. The net investment income of
Mortgage-Backed, Emerging Markets and Global Tactical Exposure Portfolios will
be declared as dividends payable to the respective shareholders of record as of
the last Business Day of each month.
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other shareholder voting matters. Matters to be acted upon affecting a
particular Portfolio (such as approval of the investment advisory agreement with
the Investment Adviser or the submission of changes to fundamental Portfolio
investment policy) require the affirmative vote of the Portfolio shareholders.
The election of the Fund's Board of Directors and the approval of the Fund's
independent auditors are voted upon by shareholders on a Fund-wide basis. The
Fund is not required to hold annual shareholder meetings. Shareholder approval
will be sought only for certain changes in the Fund's or a Portfolio's operation
and for the election of Directors under certain circumstances. Directors may be
removed by shareholders at a special meeting. The Directors shall call a special
meeting of a Portfolio upon written request of shareholders owning at least 10%
of the Portfolio's outstanding shares.
27
<PAGE>
TAX CONSIDERATIONS
The following discussion is for general information only. An investor should
consult with his or her own tax adviser as to the tax consequences of an
investment in a Portfolio, including the status of distributions from each
Portfolio under applicable state or local law. For additional information
regarding tax issues pertaining to the Portfolios, see "Supplemental Tax
Considerations" in the Statement of Additional Information.
FEDERAL INCOME TAXES
Each Portfolio will distribute all of its taxable income by automatically
reinvesting such income in additional Portfolio shares and distributing those
shares to its shareholders, unless a shareholder elects on the Account
Application Form to receive cash payments for such distributions. Shareholders
receiving distributions from the Portfolio in the form of additional shares will
be treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such a distribution.
Dividends a Portfolio pays from its investment company taxable income (including
interest and net short-term capital gains) will be taxable to U.S. shareholders
as ordinary income, whether received in cash or in additional Portfolio shares.
Designated distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) are generally taxable to
shareholders at the applicable long-term capital gains rates, regardless of how
long they have held their Portfolio shares. If a portion of a Portfolio's income
consists of dividends paid by U.S. corporations, a portion of the dividends paid
by the Portfolio may be eligible for the corporate dividends-received deduction.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by a Portfolio in October, November or December with a
record date in any such month and paid by the Portfolio during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. Each Portfolio will
inform shareholders of the amount and tax status of all amounts treated as
distributed to them not later than 60 days after the close of each calendar
year.
If a shareholder holds shares through a tax-deferred account, such as a
retirement plan, income and gains will not be taxable each year. Instead, the
taxable portion of amounts held in a tax-deferred account generally will be
subject to tax only when a distribution is made from that account.
A shareholder who sells or redeems Portfolio shares will generally realize a
capital gain or loss, which will be long-term or short-term, generally depending
upon the shareholder's holding of the shares. An exchange of shares may be
treated as a sale.
As with all mutual funds, a Portfolio may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who:
1. fail to provide the Portfolio with a correct taxpayer identification
number, or
2. fail to make required certifications, or
3. have been notified by the IRS that they are subject to backup withholding.
Backup withholding is not an additional tax; rather, it is a way in which the
IRS ensures it will collect taxes otherwise due. Any amount withheld may be
credited against U.S. federal income tax liability.
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting a Portfolio and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of a
Portfolio or its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors in a
Portfolio should consult their tax advisers with specific reference to their own
tax situation.
28
<PAGE>
STATE AND LOCAL TAXES
A Portfolio may be subject to state, local or foreign taxation in any
jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes. Portfolio
distributions derived from interest on obligations of the U.S. Government and
certain of its agencies, authorities and instrumentalities may be exempt from
state and local taxes in certain states. Shareholders should consult their own
tax advisers regarding possible state and local income tax exclusions for
dividend portions paid by a Portfolio, which are attributable to interest from
obligations of the U.S. Government, its agencies, authorities and
instrumentalities.
DISTRIBUTION OF PORTFOLIO SHARES
Shares of each Portfolio are distributed by First Fund, pursuant to a
Distribution Agreement dated as of January 1, 2000 by and among the Fund,
Investors Bank & Trust Company and First Fund. No fees are payable by the
Fund pursuant to the Distribution Agreement. Investors Bank & Trust Company
pays the distribution fees while FFTW pays all other fees and expenses
related to distribution.
29
<PAGE>
INVESTMENT INFORMATION
PERMITTED INVESTMENT STRATEGIES, INVESTMENTS AND ASSOCIATED RISKS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
U.S. Global Inflation-
Short- Limited Mortgage- Tactical Worldwide- Emerging Indexed
Term Duration Backed Exposure Worldwide Hedged International Markets Hedged
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset-Backed
Securities - - - - - - - / / / /
Bank Obligations - - / / / / / / / / / / / / / /
Brady Bonds / / / / / / / / - / /
Convertible
Securities / /
Corporate Debt
Instruments - - - - - - / / / /
Dollar Roll
Transactions / / / / - / / / / / / / / / / / /
Duration
Management - - - - - - - - -
Foreign Instruments / / / / - - - - - -
Hedging / / - - - / / - / / / / -
Illiquid Securities / / / / / / / / / / / / / / / / / /
Indexed Notes,
Currency
Exchange-Related
Securities and
Similar Securities / / / / / / / / - -
Inflation-Indexed
Securities / / / / / / / / / / / / / / / / -
Investment
Companies / / / / / / / / / / / / / / / / / /
Mortgage-Backed
Securities - - - / / / / / / / / / / / /
Multi-National
Currency Unit
Securities or More
Than One Currency
Denomination / / / / / / / / / / / /
Municipal / / / /
Instruments
Repurchase and
Reverse Repurchase
Agreements - - - / / / / / / / / / / / /
Short Sales
Transactions / / / / / / / / / / / /
Stripped Instruments / / / / - / / / / / / / / / / / /
TBA Transactions / / / / / / / / / / / / / / / / / /
Total Return Swaps - - - / / / / / / / / / /
U.S. Government
and Agency
Securities - - - - - - - - -
Warrants / / / /
When Issued and
Forward Commitment
Securities / / / / / / / / / / / / / / / / / /
Zero Coupon
Securities / / / / / / / / / / / / / / / /
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - - Principal
/ / Other
30
<PAGE>
ASSET-BACKED SECURITIES
Asset-backed securities are secured by or backed by assets other than
mortgage-related assets, such as automobile and credit card receivables. These
securities are sponsored by such institutions as finance companies, finance
subsidiaries of industrial companies and investment banks. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities, however, the underlying assets are not first lien mortgage loans or
interests, but include assets such as:
a. motor vehicle installment sale contracts,
b. other installment sale contracts,
c. leases of various types of real and personal property, and
d. receivables from revolving credit (credit card) agreements.
RISKS: The principal amount of asset-backed securities is generally
subject to partial or total prepayment risk. If an asset-backed
security is purchased at a premium or discount to par, a prepayment
rate that is faster than expected will reduce or increase,
respectively, the yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect on yield to
maturity. These securities may not have any security interest in the
underlying assets, and recoveries on the repossessed collateral may
not, in some cases, be available to support payments on these
securities.
BANK OBLIGATIONS
Bank obligations are bank-issued securities. These instruments include, but are
not limited to:
a. Time Deposits, g. Eurodollar Certificates of Deposit,
b. Certificates of Deposit, h. Variable Rate Notes,
c. Bankers' Acceptances, i. Loan Participations,
d. Bank Notes, j. Variable Amount Master Demand Notes,
e. Deposit Notes, k. Yankee CDs, and
f. Eurodollar Time deposits, l. Custodial Receipts
RISKS: Investing in bank obligations exposes a Portfolio to risks
associated with the banking industry such as interest rate and credit
risks.
BRADY BONDS
Brady Bonds are debt securities, issued or guaranteed by foreign governments in
exchange for existing external commercial bank indebtedness. To date, over $109
billion (face amount) of Brady Bonds have been issued by the governments of
seventeen countries, the largest proportion having been issued by Argentina,
Brazil, Mexico and Venezuela. Brady Bonds are either collateralized or
uncollateralized, issued in various currencies (primarily the U.S. dollar), and
are actively traded in the over-the-counter secondary market.
A Portfolio may invest in either collateralized or uncollateralized Brady Bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
RISKS: Brady Bonds are generally issued by countries with developing
capital markets or unstable governments and as such, are considered to
be among the more risky international investments.
CONVERTIBLE SECURITIES
Convertible bonds or shares of convertible preferred stock are securities that
may be converted into, or exchanged for, underlying shares of common stock,
either at a stated price or stated rate. Convertible securities have general
characteristics similar to both fixed income and equity securities.
RISKS: Typically, convertible securities are callable by the company,
which may, in effect, force conversion before the holder would
otherwise choose. If the issuer chooses to convert the security, this
action could have an adverse effect on a Portfolio's ability to
achieve its objectives.
31
<PAGE>
CORPORATE DEBT INSTRUMENTS
Corporate bonds are debt instruments issued by private corporations. As
creditors, bondholders have a prior legal claim over common and preferred
stockholders of the corporation as to both income and assets for the principal
and interest due to the bondholder. A Portfolio purchases corporate bonds
subject to quality restraints. Commercial paper, notes and other obligations of
U.S. and foreign corporate issuers (including medium-term and variable rate
notes) must meet a Portfolio's credit quality standards. A Portfolio may retain
a downgraded corporate debt security if the Investment Adviser determines
retention of such security to be in such Portfolio's best interests.
RISKS: Investing in corporate debt securities subjects a Portfolio to
interest rate changes and credit risks.
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions consist of the sale of mortgage-backed securities, with
a commitment to purchase similar, but not identical securities at a future date,
and at the same price. Portfolios will maintain a segregated custodial account
for dollar roll transactions. The segregated accounts may contain cash, U.S.
Government Securities or other liquid, unencumbered securities having an
aggregate value at least equal to the amount of such commitments to repurchase
the securities under the dollar roll transaction (including accrued interest).
RISKS: Should the broker-dealer to whom a Portfolio sells an
underlying security of a dollar roll transaction become insolvent, the
Portfolio's right to purchase or repurchase the security may be
restricted, or the price of the security may change adversely over the
term of the dollar roll transaction.
DURATION MANAGEMENT
Duration measures a bond's price volatility, incorporating the following
factors:
a. the bond's yield,
b. coupon interest payments,
c. final maturity,
d. call features, and
e. prepayment assumptions.
Duration measures the expected life of a debt security on a present value basis.
It incorporates the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled (or in the case
of a callable bond, expected to be received) and weighs them by the present
values of the cash to be received at each future point in time. For any debt
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, for the same maturity, the
lower the stated or coupon rate of interest of a debt security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a debt security, the shorter the duration of the security.
Futures, options and options on futures have durations closely related to the
duration of the securities that are underlying them. Holding long futures or
call options will lengthen a Portfolio's duration by approximately the same
amount that holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions and have the
effect of reducing duration by approximately the same amount that selling an
equivalent amount of the underlying securities would. The market price of a bond
with a duration of two years would be expected to decline 2% if interest rates
rose 1%. If a bond has an effective duration of three years, a 1% increase in
general interest rates would be expected to cause the bond's value to decline by
about 3%.
RISKS: Changes in weighted average duration of a Portfolio's holdings
are not likely to be so large as to cause them to fall outside the
ranges specified above. There is no assurance that deliberate changes
in a Portfolio's weighted average duration will enhance its return
relative to more static duration policies or Portfolio structures. In
addition, it may detract from its relative return.
FOREIGN INSTRUMENTS
a. FOREIGN SECURITIES
Foreign securities are securities denominated in currencies other than the U.S.
dollar and may be denominated in any single currency or multi-currency units.
The Investment Adviser and the Sub-Adviser will adjust exposure of a Portfolio
32
<PAGE>
to different currencies based on their perception of the most favorable markets
and issuers. In allocating assets among multiple markets for certain Portfolios,
the Investment Adviser and the Sub-Adviser will assess the relative yield and
anticipated direction of interest rates in particular markets, general market
and economic conditions and the relationship of currencies of various countries
to each other. In their evaluations, the Investment Adviser and the Sub-Adviser
will use internal financial, economic and credit analysis resources as well as
information obtained from external sources. For U.S. Short-Term, Limited
Duration and Mortgage-Backed Portfolios, it is anticipated that foreign
securities will be issued primarily by governmental and private entities located
in such countries and by supranational entities, and each Portfolio will only
invest in countries considered to have stable governments, based on the
Investment Adviser's analysis of social, political and economic factors.
The global and international Portfolios, except Emerging Markets Portfolio, will
invest primarily in securities denominated in the currencies of the United
States, Japan, Canada, Western European nations, New Zealand and Australia, as
well as securities denominated in the Euro and the European Currency Unit.
Further, it is anticipated that such securities will be issued primarily by
governmental and private entities located in such countries and by supranational
entities. Portfolios will only invest in countries considered to have stable
governments, based on the Investment Adviser's analysis of social, political and
economic factors.
b. FOREIGN GOVERNMENT, INTERNATIONAL AND SUPRANATIONAL AGENCY SECURITIES
These securities include debt obligations issued or guaranteed by a foreign
government or its subdivisions, agencies and instrumentalities, international
agencies and supranational entities.
RISKS: Generally, foreign financial markets have substantially less
volume than the U.S. market. Securities of many foreign companies are
less liquid, and their prices are more volatile than securities of
comparable domestic companies. Certain Portfolios may invest portions
of their assets in securities denominated in foreign currencies. These
investments carry risks of fluctuations of exchange rates relative to
the U.S. dollar. Securities issued by foreign entities (governments,
corporations etc.) may involve risks not associated with U.S.
investments, including expropriation of assets, taxation, political or
social instability and low financial reporting standards--all of which
may cause declines in investment returns.
c. EMERGING MARKETS SECURITIES
Emerging markets securities are foreign securities issued from countries which
are considered to be "emerging" or "developing" by the Morgan Stanley Capital
Index (MSCI) or by the World Bank. Such emerging markets include all markets
other than Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.
RISKS: The risks of investing in foreign securities may be intensified
when the issuers are domiciled or doing substantial business in
emerging market countries or countries with developing capital
markets. Security prices in emerging markets can be significantly more
volatile than those in more developed nations of the world, reflecting
the greater uncertainties of investing in less established markets and
economies. Emerging market countries may have:
<TABLE>
<S> <C>
a. Relatively unstable governments; d. restrictions on foreign ownership;
b. present the risk of sudden adverse government action; e. prohibitions of repatriation of assets; or
c. nationalization of businesses; f. less protection of property rights than more developed countries
</TABLE>
The economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. Transaction settlement procedures may be less reliable in
emerging markets than in developed markets. Securities of issuers located in
countries with emerging markets may have limited marketability and may be
subject to more abrupt or erratic price movements.
33
<PAGE>
HEDGING
Hedging techniques are used to offset certain investment risks. Such risks
include: changes in interest rates, changes in foreign currency exchange rates
and changes in securities and commodity prices. Hedging techniques are commonly
used to minimize a given instrument's risks of future gain or loss. Hedging
techniques include:
<TABLE>
<S> <C>
a. engaging in swaps; d. purchasing and selling futures contracts; and
b. purchasing and selling caps, floors and collars; e. purchasing and selling options.
c. purchasing or selling forward exchange contracts;
</TABLE>
All hedging instruments described below constitute commitments by a Portfolio
and therefore require the Portfolio to segregate cash (in any applicable
currency), U.S. Government securities or other liquid and unencumbered
securities (in any applicable currency) equal to the amount of the Portfolio's
obligations in a separate custody account.
When a Portfolio purchases a futures or forward currency contract for
non-hedging purposes, the sum of the segregated assets plus the amount of
initial and variation margin held in the broker's account, if applicable, must
equal the market value of the futures or forward currency contract.
When a Portfolio sells a futures or forward currency contract for non-hedging
purposes, the Portfolio will have the contractual right to acquire:
1. the securities,
2. the foreign currency subject to the futures, or
3. the forward currency contract.
The Portfolio will segregate assets, in an amount at least equal to the market
value of the securities or foreign currency underlying the futures or forward
currency contract.
Should the market value of the contract move adversely to the Portfolio, or if
the value of the securities in the segregated account declines, the Portfolio
will be required to deposit additional cash or securities in the segregated
account at a time when it may be disadvantageous to do so.
A Portfolio will not enter into any swaps, caps or floors unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either A or A-1 or better by S&P or A or P-1 or better by Moody's. If
unrated, it must be determined to be of comparable quality by the Investment
Adviser.
a. SWAPS
Swaps are commonly used for hedging purposes. Hedging involving mortgage and
interest rate swaps may enhance total return. Interest rate swaps involve a
Portfolio's exchange with another party of their respective commitments to pay
or receive interest, such as an exchange of fixed rate payments for floating
rate payments. Mortgage swaps are similar to interest rate swaps, both represent
commitments to pay and receive funds. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
b. CAPS, FLOORS AND COLLARS
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar incorporates a cap and
a floor in one transaction as described above.
c. FORWARD FOREIGN EXCHANGE CONTRACTS
A forward foreign exchange contract is the purchase or sale of a foreign
currency, on a specified date, at an exchange rate established before the
currency's payment and delivery to hedge the currency exchange risk associated
with its assets or obligations denominated in foreign currencies. Synthetic
hedging is a technique utilizing forward foreign exchange contracts that is
frequently employed by many of the Portfolios. It entails entering into a
forward contract to sell a currency, the changes in value of which are generally
considered to be linked to a currency or currencies in
34
<PAGE>
which some or all of the Portfolio's securities are or are expected to be
denominated, and buying U.S. dollars. There is a risk that the perceived linkage
between various currencies may not be present during the particular time that a
Portfolio is engaging in synthetic hedging. A Portfolio may also cross-hedge
currencies by entering into forward contracts to sell one or more currencies
that are expected to decline in value relative to other currencies to which the
Portfolio has or expects to have exposure.
d. FUTURES CONTRACTS
A futures contract is an agreement to buy or sell a specific amount of a
financial instrument at a particular price on a specified date. The futures
contract obligates the buyer to purchase the underlying commodity and the seller
to sell it. Losses from investing in futures transactions that are unhedged or
uncovered are potentially unlimited. Substantially all futures contracts are
closed out before settlement date or called for cash settlement. A futures
contract is closed out by buying or selling an identical offsetting futures
contract that cancels the original contract to make or take delivery. At times,
the ordinary spreads between values in the cash and futures markets, due to
differences in the character of these markets, are subject to distortions. The
possibility of such distortions means that a correct forecast of general market,
foreign exchange rate or interest rate trends may not produce the Portfolio's
intended results.
e. OPTIONS CONTRACTS
An option is a contractual right, but not an obligation, to buy (call) or sell
(put) property that is guaranteed in exchange for an agreed upon sum. If the
right is not exercised within a specified period of time, the option expires and
the option buyer forfeits the amount paid. An option may be a contract that
bases its value on the performance of an underlying bond. When a Portfolio
writes a call option, it gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open. A put option gives the purchaser, in return for
a premium, the right, for a specified period or time, to sell the securities or
currency subject to the option to the writer of the put at the specified
exercise price. The writer of the put option, in return for the premium, has the
obligation, upon exercise of the option, to acquire the securities or currency
underlying the option at the exercise price. A Portfolio might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
RISKS: Hedging involves risks of imperfect correlation in price
movements of the hedge and movements in the price of the hedged
security. If interest or currency exchange rates do not move in the
direction of the hedge, a Portfolio will be in a worse position than
if hedging had not been employed. As a result, it will lose all or
part of the benefit of the favorable rate movement due to the cost of
the hedge or offsetting positions. Hedging transactions not entered
into on a U.S. or foreign exchange may subject a Portfolio to exposure
to the credit risk of its counterparty. Futures and options
transactions entail special risks. In particular, the variable degree
of correlation between price movements of futures contracts and price
movements in the related Portfolio position could create the
possibility that losses will be greater than gains in the value of the
Portfolio's position. Other risks include the risk that a Portfolio
could not close out a futures or options position when it would be
most advantageous to do so.
ILLIQUID SECURITIES
Illiquid securities cannot be sold or disposed of in the ordinary course of
business within seven days for approximately the value at which a Portfolio has
valued the securities. These include:
1. securities with legal or contractual restrictions on resale,
2. time deposits, repurchase agreements and dollar roll transactions having
maturities longer than seven days, and
3. securities not having readily available market quotations.
Although the Portfolios are allowed to invest up to 15% of the value of their
net assets in illiquid assets, it is not expected that any Portfolio will invest
a significant portion of its assets in illiquid securities. The Investment
Adviser monitors the liquidity of such restricted securities under the
supervision of the Board of Directors.
A Portfolio may purchase securities not registered under the Securities Act of
1933 as amended, (the "1933 Act"), but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act. A Portfolio
may also invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the 1933 Act
(Section 4(2) paper). Section 4(2) paper is restricted as to disposition under
35
<PAGE>
the federal securities laws, and generally is sold to institutional investors.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
is normally resold to other institutional investors through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not determined
to be liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The Investment Adviser will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors.
RISKS: Investing in illiquid securities presents the potential risks
of tying up a Portfolio's assets at a time when liquidating assets may
be necessary to meet debts and obligations.
INDEXED NOTES, CURRENCY EXCHANGE-RELATED SECURITIES AND SIMILAR SECURITIES
These securities are notes, the principal amount of which and/or the rate of
interest payable is determined by reference to an index. This index may be
determined by the rate of exchange between the specified currency for the note
and one or more other currencies or composite currencies.
RISKS: Foreign currency markets can be highly volatile and are subject
to sharp price fluctuations. A high degree of leverage is typical for
foreign currency instruments in which a Portfolio may invest.
INFLATION-INDEXED SECURITIES
Inflation-indexed securities are linked to the inflation rate from worldwide
bond markets such as the U.S. Treasury Department's "inflation-protection"
issues. The initial issues are ten year notes which are issued quarterly. Other
maturities will be sold at a later date. The principal is adjusted for inflation
(payable at maturity) and the semi-annual interest payments equal a fixed
percentage of the inflation adjusted principal amount. The inflation adjustments
are based upon the Consumer Price Index for Urban Consumers. These securities
may be eligible for coupon stripping under the U.S. Treasury program. In
addition to the U.S. Treasury's issues, inflation-indexed securities include
inflation-indexed securities from other countries such as Australia, Canada, New
Zealand, Sweden and the United Kingdom.
RISKS: If the periodic adjustment rate measuring inflation falls, the
principal value of inflation-indexed bonds will be adjusted downward,
and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment
of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. The
current market value of the bonds is not guaranteed, and will
fluctuate. The Portfolios also may invest in other inflation related
bonds that may or may not provide a similar guarantee. If a guarantee
of principal is not provided, the adjusted principal value of the bond
repaid at maturity may be less than the original principal.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is limited trading history for these securities,
and there can be no assurance that a liquid market in these
instruments will develop, although one is expected to continue to
evolve. Lack of a liquid market may impose the risk of higher
transaction costs and the possibility that a Portfolio may be forced
to liquidate positions when it would not be advantageous to do so.
Finally, there can be no assurance that the Consumer Price Index for
Urban Consumers will accurately measure the real rate of inflation in
the price of goods and services.
INVESTMENT COMPANIES
An investment company is an investment vehicle, which, for a management fee,
invests the pooled funds of investors in securities appropriate for its
investment objectives. Two basic types of investment companies exist:
1. Open end funds: these funds have a floating number of outstanding shares
and will sell or redeem shares at their current net asset value,
2. Closed end funds: these funds have a fixed number of outstanding shares
that are traded on an exchange.
The Portfolios will not invest in any funds classified as "load funds."
The acquiring company may not purchase or otherwise acquire securities in the
acquired company (if no-load) if, immediately after the acquisition, the
acquiring company and any company controlled by it would own in the aggregate
36
<PAGE>
more than 3% of the total outstanding voting stock of the acquired company or
would not otherwise comply with any requirements under the Investment Company
Act of 1940.
A Portfolio may invest in another Portfolio within the FFTW Funds, Inc., family.
This is commonly referred to as cross-portfolio investing. Should such
cross-portfolio investing occur, investors will not be double-charged advisory
fees. The Portfolio in which it is directly invested will only charge investors
an advisory fee.
RISKS: Generally, risks posed by a particular fund will mirror those
posed by the underlying securities. A money market fund has the
highest safety of principal, whereas bond funds are vulnerable to
interest rate movements.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities representing ownership interests in,
or debt obligations secured entirely or primarily by, "pools" of residential or
commercial mortgage loans or other mortgage-backed securities. Mortgage-backed
securities may take a variety of forms, the most common being:
1. Mortgage-pass through securities issued by
a. the Government National Mortgage Association (Ginnie Mae),
b. the Federal National Mortgage Association (Fannie Mae),
c. the Federal Home Loan Mortgage Corporation (Freddie Mac),
d. commercial banks, savings and loan associations, mortgage banks or by
issuers that are affiliates of or sponsored by such entities,
2. Collateralized mortgage obligations (CMOs) which are debt obligations
collateralized by such assets, and
3. Commercial mortgage-backed securities.
The Investment Adviser expects that new types of mortgage-backed securities may
be created offering asset pass-through and asset-collateralized investments in
addition to those described above by governmental, government-related and
private entities. As new types of mortgage-related securities are developed and
offered to investors, the Investment Adviser will consider whether it would be
appropriate for a Portfolio to make investments in them.
CMOs are derivatives collateralized by mortgage pass-through securities. Cash
flows from mortgage pass-through securities are allocated to various tranches in
a predetermined, specified order. Each tranche has a stated maturity--the latest
date by which the tranche can be completely repaid, assuming no prepayments--and
has an average life--the average of the time to receipt of a principal payment
weighted by the size of the principal payment. The average life is typically
used as a proxy for maturity because the debt is amortized, rather than being
paid off entirely at maturity.
RISKS: A Portfolio may invest in mortgage-backed and other
asset-backed securities carrying the risk of a faster or slower than
expected prepayment of principal which may affect the duration and
return of the security. Portfolio returns will be influenced by
changes in interest rates. Changes in market yields affect a
Portfolio's asset value since Portfolio debt will generally increase
in value when interest rates fall and decrease when interest rates
rise. Compared to debt that cannot be prepaid, mortgage-backed
investments are less likely to increase in value during periods of
declining interest rates and have a higher risk of decline in value
during periods of rising interest rates. Thus, interest rates have an
inverse relationship with corresponding market values. Prices of
shorter-term securities generally fluctuate less in response to
interest rate changes than do longer-term securities.
MULTI-NATIONAL CURRENCY UNIT SECURITIES OR MORE THAN ONE CURRENCY DENOMINATION
Multi-national currency unit securities are tied to currencies of more than one
nation. This includes the European Currency Unit--a "basket" consisting of
specified currencies of the member states of the European Community (a Western
European economic cooperative organization). These securities include securities
denominated in the currency of one nation, although it is issued by a
governmental entity, corporation or financial institution of another nation.
RISKS: Investments involving multi-national currency units are subject
to changes in currency exchange rates which may cause the value of
such invested securities to decrease relative to the U.S. dollar.
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<PAGE>
MUNICIPAL INSTRUMENTS
Municipal instruments are debt obligations issued by a state or local government
entity. The instruments may support general governmental needs or special
governmental projects. It is not anticipated that such instruments will ever
represent a significant portion of any Portfolio's assets.
RISKS: Investments in municipal instruments are subject to the
municipality's ability to make timely payment. Municipal instruments
may also be subject to bankruptcy protection should the municipality
file for such protection.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Under a repurchase agreement, a bank or securities firm (that is a dealer in
U.S. Government Securities reporting to the Federal Reserve Bank of New York) or
the Fund's Custodian agrees to sell U.S. Government Securities to a Portfolio
and repurchase such securities from the Portfolio for an agreed price at a later
date. Under a reverse repurchase agreement, a primary or reporting dealer in
U.S. Government Securities purchases U.S. Government Securities from a Portfolio
and the Portfolio agrees to repurchase the securities for an agreed price at a
later date.
Each Portfolio will maintain a segregated custodial account for its reverse
repurchase agreements. Until repayment is made, the segregated accounts may
contain cash, U.S. Government Securities or other liquid, unencumbered
securities having an aggregate value at least equal to the amount of such
commitments to repurchase (including accrued interest). Repurchase and reverse
repurchase agreements will generally be restricted to those maturing within
seven days.
RISKS: If the other party to a repurchase and/or reverse repurchase
agreement becomes subject to a bankruptcy or other insolvency
proceeding, or fails to satisfy its obligations thereunder, delays may
result in recovering cash or the securities sold, or losses may occur
as to all or part of the income, proceeds or rights in the security.
SHORT SALES
Short sales are transactions in which a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. Short
selling provides the Investment Adviser with flexibility to reduce certain risks
of the Portfolio's holdings and increase the Portfolio's total return. To the
extent that the Portfolio has sold securities short, it will maintain a daily
segregated account, containing cash, U.S. Government securities or other liquid
and unencumbered securities, at such a level that (a) the amount deposited in
the account plus the amount deposited with the broker as collateral will equal
the current value of the security sold short and (b) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short.
RISKS: A short sale is generally used to take advantage of an
anticipated decline in price or to protect a profit. A Portfolio will
incur loss as a result of a short sale if the price of the security
increases between the date of the short sale and the date on which
Portfolio replaces the borrowed money. The amount of any loss will be
increased by the amount of any premium or amounts in lieu of interest
the Portfolio may be required to pay in connection with a short sale.
Without the purchase of an option, the potential loss from a short
sale is unlimited.
STRIPPED INSTRUMENTS
Stripped instruments are bonds, reduced to its two components: its rights to
receive periodic interest payments (IOs) and rights to receive principal
repayments (POs). Each component is then sold separately. Such instruments
include:
a. Municipal Bond Strips
b. Treasury Strips
c. Stripped Mortgage-Backed Securities
RISKS: POs do not pay interest, its return is solely based on payment
of principal at maturity. Both POs and IOs tend to be subject to
greater interim market value fluctuations in response to changes in
interest rates. Stripped Mortgage-Backed Securities IOs run the risk
of unanticipated prepayment which will decrease the instrument's
overall return.
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<PAGE>
TBA (TO BE ANNOUNCED) TRANSACTIONS
In a TBA transaction, the type of mortgage-backed securities to be delivered is
specified at the time of trade, but the actual pool numbers of the securities to
be delivered are not known at the time of the trade. For example, in a TBA
transaction, an investor could purchase $1 million 30 year mortgage-backed
securities issued by the Federal National Mortgage Association and receive up to
three pools on the settlement date. The pool numbers to be delivered at
settlement will be announced shortly before settlement takes place. Agency
pass-through mortgage-backed securities are usually issued on a TBA basis. Each
Portfolio will maintain a segregated custodial account containing cash, U.S.
Government Securities or other liquid and unencumbered securities having a value
at least equal to the aggregate amount of a Portfolio's TBA transactions.
RISKS: The value of the security on the date of delivery may be less
than its purchase price, presenting a possible loss of asset value.
TOTAL RETURN SWAPS
A total return swap is an exchange of one security for another. Unlike a hedge
swap, a total return swap is solely entered into as a derivative investment to
enhance total return.
RISKS: A total return swap may result in a Portfolio obtaining an
instrument, which for some reason, does not perform as well as the
original swap instrument. Additionally, potential risks of default
also exist on the part of the counterparty.
U.S. GOVERNMENT AND AGENCY SECURITIES AND GOVERNMENT-SPONSORED
ENTERPRISES/FEDERAL AGENCIES
U.S. Government and agency securities are issued by or guaranteed as to
principal and interest by the U.S. Government, its agencies or instrumentalities
and supported by the full faith and credit of the United States. A Portfolio
also may invest in other securities which may be issued by a U.S.
Government-sponsored enterprise or federal agency, and supported either by its
ability to borrow from the U.S. Treasury or by its own credit standing. Such
securities do not constitute direct obligations of the United States but are
issued, in general, under the authority of an Act of Congress. The universe of
eligible securities in these categories include those sponsored by:
a. U.S. Treasury Department,
b. Farmer's Home Administration,
c. Federal Home Loan Mortgage Corporation,
d. Federal National Mortgage Association,
e. Student Loan Marketing Association, and
f. Government National Mortgage Association.
RISKS: Investing in securities backed by the full faith and credit of
the U.S. Government are guaranteed only as to interest rate and face
value at maturity, not its current market price.
WARRANTS
A warrant is a corporate-issued option that entitles the holder to buy a
proportionate amount of common stock at a specified price. Warrants are freely
transferable and can be traded on the major exchanges.
RISKS: Warrants retain their value only so long as the stock retains
its value. Typically, when the value of the stock drops, the value of
the warrant drops.
WHEN ISSUED AND FORWARD COMMITMENT SECURITIES
The purchase of a when issued or forward commitment security will be recorded on
the date a Portfolio enters into the commitment. The value of the security will
be reflected in the calculation of the Portfolio's net asset value. The value of
the security on delivery date may be more or less than its purchase price.
Generally, no interest accrues to a Portfolio until settlement. Each Portfolio
will maintain a segregated custodial account containing cash, U.S. Government
securities or other liquid and unencumbered securities having a value at least
equal to the aggregate amount of a Portfolio's when issued and forward
commitments transactions.
RISKS: The value of the security on the date of delivery may be less
than its purchase price, presenting a possible loss of asset value.
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<PAGE>
ZERO COUPON SECURITIES
Zero coupon securities are sold at a deep discount from their face value. Such
securities make no periodic interest payments, however, the buyer receives a
rate of return by the gradual appreciation of the security, until it is redeemed
at face value on a specified maturity date.
RISKS: Zero coupon securities do not pay interest until maturity and
tend to be subject to greater interim market value fluctuations in
response to interest rate changes rather than interest paying
securities of similar maturities. Credit risk is generally greater for
these investments that are required to pay interest only at maturity
rather than at intervals during the life of the investment.
PORTFOLIO TURNOVER
Portfolio turnover rates are believed to be higher than the turnover experienced
by most fixed income funds, due to the Investment Adviser's active management of
duration. This could, in turn, lead to higher turnover costs. High portfolio
turnover may involve greater brokerage commissions and transactions costs which
will be paid by a Portfolio. In addition, high turnover rates may result in
increased short-term capital gains.
SUPPLEMENTAL INVESTMENT POLICIES
ALL PORTFOLIOS
Each Portfolio may invest more than 5% of its net assets in futures margins
and/or premiums on options only if it is being used for bona fide hedging
purposes.
U.S. SHORT-TERM, WORLDWIDE AND WORLDWIDE-HEDGED PORTFOLIOS
These Portfolios may not enter into a repurchase or reverse repurchase agreement
if, as a result thereof, more than 25% of a Portfolio's total assets would be
subject to such agreements.
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FINANCIAL HIGHLIGHTS TABLES
The Financial Highlights Tables are intended to help you understand the
Portfolios' financial performance for the past five years, or, if shorter, the
period of the Portfolio's operations. Certain information reflects financial
results for a single Portfolio share. The "Total Return" indicates how much an
investment in each respective Portfolio would have earned or lost, assuming all
dividends and distributions had been reinvested.
This information for the year ended December 31, 1999 has been audited by KPMG
LLP. You will find the auditor's report and the FFTW Funds, Inc., financial
statements in the annual report, which is available upon request. Financial
Highlights for the years prior to 1999 were audited by other auditors.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
U.S. SHORT-TERM PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS EXCEPT WHERE OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT Year Ended Year Ended Year Ended Year Ended Year Ended
THE PERIOD 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $9.76 $9.77 $9.85 $9.88 $9.89
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) From Investment Operations
Investment income, net 0.51* 0.54 0.57 0.55 0.56
Net realized and unrealized loss on investments
and financial futures and options contracts,
and foreign currency-related transactions (0.11) (0.01) (0.08) (0.03) (0.01)
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.40 0.53 0.49 0.52 0.55
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.51 0.54 0.57 0.55 0.56
In excess of investment income, net -- -- -- -- 0.00**
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.51 0.54 0.57 0.55 0.56
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.65 $9.76 $9.77 $9.85 $9.88
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return 4.26% 5.59% 5.09% 5.45% 5.71%
Ratios/Supplemental Data
Net assets, end of period (000's) $650,447 $840,366 $486,906 $355,257 $457,425
Ratio of operating expenses to average
net assets, exclusive of interest
expense (a) 0.25% 0.25% 0.25% 0.27% 0.40%
Ratio of operating expenses to average
net assets, inclusive of interest
expense (a) 0.25% 0.25% 0.26% 0.40% 0.51%
Ratio of investment income, net to average
net assets (a) 5.29% 5.48% 5.78% 5.62% 5.64%
Decrease in above expense ratios due
to waiver of investment advisory and
administration fees 0.18% 0.17% 0.18% 0.05% 0.07%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements.
* Calculation done based on average shares outstanding.
** Rounds to less than $0.01.
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<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE Year Ended Year Ended Year Ended Year Ended Year Ended
PERIOD 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $9.93 $9.93 $9.93 $10.00 $9.55
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) From Investment Operations
Investment income, net 0.55* 0.55 0.62 0.55 0.60
Net realized and unrealized gain (loss) on
investments financial futures and options
contracts, and foreign currency-related transactions (0.27) 0.11 0.08 (0.04) 0.45
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.28 0.66 0.70 0.51 1.05
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.55 0.55 0.62 0.55 0.60
In excess of investment income, net -- 0.00** -- 0.00** --
From net realized and unrealized gain on
investments financial futures and options
contracts and foreign currency-related transactions -- 0.11 0.08 0.03 --
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.55 0.66 0.70 0.58 0.60
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.66 $9.93 $9.93 $9.93 $10.00
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return 2.88% 6.79% 7.21% 5.29% 11.26%
Ratios/Supplemental Data
Net assets, end of period (000's) $100,105 $89,521 $40,029 $42,100 $5,080
Ratio of operating expenses to average net assets,
exclusive of interest expense (a) 0.30% 0.30% 0.30% 0.31% 0.50%
Ratio of operating expenses to average net assets,
inclusive of interest expense (a) 0.30% 0.30% 0.60% 0.49% 1.41%
Ratio of investment income, net to average
net assets (a) 5.60% 5.48% 6.10% 5.79% 6.09%
Decrease in above expense ratios due to waiver of
investment advisory fees and reimbursement of
other expenses 0.24% 0.22% 0.31% 0.15% 0.53%
Portfolio Turnover 823% 1,059% 1,292% 1,387% 1,075%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements.
* Calculation done based on average shares outstanding.
** Rounds to less than $0.01.
42
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD Period From
Year Ended Year Ended Year Ended 4/20/96* to
12/31/99 12/31/98 12/31/97 12/31/96
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $10.18 $10.30 $10.16 $10.00
Increase (Decrease) From Investment Operations
Investment income, net 0.61** 0.68 0.68 0.41
Net realized and unrealized gain (loss) on investments,
short sales, and financial futures, swaps
and options contracts (0.49) 0.07 0.32 0.23
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.12 0.75 1.00 0.64
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.64 0.65 0.63 0.41
In excess of investment income, net -- -- 0.05 0.06
From net realized gain on investments, short sales, and
financial futures, swaps and options contracts 0.02 0.22 0.18 0.01
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.66 0.87 0.86 0.48
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.64 $10.18 $10.30 $10.16
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return 1.21% 7.42% 10.19% 6.54% (c)
Ratios/Supplemental Data
Net assets, end of period (000's) $298,265 $815,367 $655,271 $220,990
Ratio of operating expenses to average net assets,
exclusive of interest expense (a) 0.24% 0.23% 0.38% 0.45% (b)
Ratio of operating expenses to average net assets,
inclusive of interest expense (a) 0.24% 0.37% 0.47% 0.88% (b)
Ratio of investment income, net to average net assets (a) 6.10% 6.33% 6.07% 7.61% (b)
Decrease in above expense ratios due to waiver of investment
advisory fees and reimbursement of other expenses 0.20% 0.20% 0.07% 0.10% (b)
Portfolio Turnover 745% 843% 3,396% 590%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements.
(b) Annualized.
(c) Not annualized.
* Commencement of Operations.
** Calculation done using average shares outstanding.
43
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
GLOBAL TACTICAL EXPOSURE PORTFOLIO
FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
Period From
FOR A SHARE OUTSTANDING THROUGHOUT THE Year Ended Year Ended Year Ended Year Ended 9/14/95* to
PERIOD 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $10.25 $10.05 $9.80 $10.19 $10.00
Increase (Decrease) From Investment Operations
Investment income, net 0.46** 0.52** 0.41 0.47 0.19
Net realized and unrealized gain (loss) on investments,
financial futures and swap and options contracts and
foreign currency-related transactions (0.17) 0.28 0.43 (0.15) 0.19
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.29 0.80 0.84 0.32 0.38
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.46 0.53 0.36 0.47 0.19
In excess of investment income, net -- 0.00 (c) 0.17 -- 0.00 (c)
From net realized gain on investments, financial futures,
swap and options contracts, and foreign
currency-related transactions -- -- 0.06 0.05 --
In excess of net realized gain on investments,
financial futures, swap and options contracts, and
foreign currency-related transactions -- 0.07 -- 0.09 --
From capital stock in excess of par value -- -- -- 0.10 --
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.46 0.60 0.59 0.71 0.19
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.08 $10.25 $10.05 $9.80 $10.19
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return 2.90% 8.20% 8.77% 3.18% 3.80% (b)
Ratios/Supplemental Data
Net assets, end of period (000's) $131,744 $423,966 $283,005 $126,645 $34,005
Ratio of operating expenses to average net assets,
exclusive of interest expense (a) 0.28% 0.27% 0.42% 0.60% 0.60% (b)
Ratio of operating expenses to average net assets,
inclusive of interest expense (a) 4.89% 5.54% 0.42% 0.60% 0.60% (b)
Ratio of investment income, net to average net assets (a) 4.51% 5.14% 3.67% 4.65% 6.12% (b)
Decrease in above expense ratios due to waiver of
investment advisory fees and reimbursement of
other expenses 0.30% 0.30% 0.16% 0.06% 0.17% (b)
Portfolio Turnover 413% 766% 712% 784% 764%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements.
(b) Annualized.
(c) Rounds to less than $0.01.
* The portfolio recommenced operations on September 14, 1995.
** Calculation done based on average shares outstanding.
44
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
WORLDWIDE PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE Year Ended Year Ended Year Ended Year Ended Year Ended
PERIOD 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $10.28 $9.42 $9.64 $9.83 $9.27
Increase (Decrease) From Investment Operations
Investment income, net 0.43* 0.46 0.49 0.53 0.58
Net realized and unrealized gain (loss) on
investments, financial futures contracts and
foreign currency-related transactions (0.98) 0.96 (0.22) 0.01 0.56
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.55) 1.42 0.27 0.54 1.14
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.61 0.46 0.19 0.53 0.30
In excess of investment income, net -- -- 0.11 -- --
From net realized gain on investments,
financial futures contracts and foreign
currency-related transactions -- 0.10 -- 0.09 --
From capital stock in excess of par value -- -- 0.19 0.11 0.28
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.61 0.56 0.49 0.73 0.58
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.12 $10.28 $9.42 $9.64 $9.83
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return (5.38%) 15.58% 2.93% 5.77% 12.60%
Ratios/Supplemental Data
Net assets, end of period (000's) $68,581 $69,653 $82,236 $74,939 $86,186
Ratio of operating expenses to average net assets,
exclusive of interest expense (a) 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of operating expenses to average net assets,
inclusive of interest expense (a) 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of investment income, net to average net assets (a) 4.51% 4.76% 5.21% 5.52% 6.13%
Decrease in above expense ratios due to waiver of
investment advisory fees and reimbursement of
other expenses 0.03% 0.01% 0.02% 0.05% 0.30%
Portfolio Turnover 390% 668% 713% 1,126% 1,401%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements.
* Calculation done based on average shares outstanding.
45
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
WORLDWIDE-HEDGED PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE Year Ended Year Ended Year Ended Year Ended Year Ended
PERIOD 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $11.19 $11.23 $10.91 $10.85 $10.41
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) From Investment Operations
Investment income, net 0.51* 0.59 0.53 0.62 0.45
Net realized and unrealized gain (loss) on
investments, financial futures contracts and
foreign currency-related transactions (0.53) 0.68 0.80 0.43 0.66
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.02) 1.27 1.33 1.05 1.11
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.59 0.70 0.59 0.62 0.67
In excess of investment income, net -- -- -- 0.37 --
From net realized gain on investments,
financial futures contracts and foreign
currency-related transactions 0.00** 0.61 0.42 -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.59 1.31 1.01 0.99 0.67
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.58 $11.19 $11.23 $10.91 $10.85
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return (0.19%) 11.53% 12.60% 10.03% 11.00%
Ratios/Supplemental Data
Net assets, end of period (000's) $181,535 $174,805 $80,390 $30,024 $28,255
Ratio of operating expenses to average net assets,
exclusive of interest expense (a) 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of operating expenses to average net assets,
inclusive of interest expense (a) 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of investment income, net to average net assets (a) 4.70% 4.85% 5.29% 5.71% 5.84%
Decrease in above expense ratios due to waiver of
investment advisory fees and reimbursement of
other expenses 0.14% 0.13% 0.20% 0.24% 0.54%
Portfolio Turnover 404% 745% 704% 1,087% 500%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements.
* Calculation done based on average shares outstanding.
** Rounds to less than $0.01.
46
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
Period From
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD Year Ended Year Ended Year Ended 5/9/96* to
12/31/99 12/31/98 12/31/97 12/31/96
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $9.68 $9.50 $10.20 $10.00
Increase (Decrease) From Investment Operations
Investment income, net 0.37** 0.48 0.50 0.38
Net realized and unrealized gain (loss) on investments,
financial futures contracts and foreign
currency-related transactions (0.98) 1.21 (0.56) 0.28
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.61) 1.69 (0.06) 0.66
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.37 0.45 0.14 0.38
In excess of investment income, net -- 0.40 -- --
From net realized gain on investments, financial
futures contracts and foreign currency-related
transactions -- 0.66 0.14 0.08
From capital stock in excess of par value -- -- 0.36 --
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.37 1.51 0.64 0.46
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.70 $9.68 $9.50 $10.20
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return (6.34%) 18.35% (0.43%) 6.66% (c)
Ratios/Supplemental Data
Net assets, end of period (000's) $103,564 $81,705 $67,653 $35,746
Ratio of operating expenses to average net assets (a) 0.60% 0.60% 0.60% 0.60% (b)
Ratio of investment income, net to average net assets (a) 4.13% 4.56% 5.19% 5.73% (b)
Decrease in above expense ratios due to waiver of investment
advisory fees 0.00%# 0.03% 0.10% 0.32% (b)
Portfolio Turnover 569% 1,049% 809% 539%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements.
(b) Annualized.
(c) Not annualized.
* Commencement of Operations.
** Calculation done based on average shares outstanding.
# Rounds to less than 0.01%.
47
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- - -----------------------------------------------------------------------------------------------------------------------------------
Period From
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD Year Ended Year Ended 8/12/97* to
12/31/99 12/31/98 12/31/97
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Data
Net asset value, beginning of period $7.72 $9.59 $10.00
Increase (Decrease) From Investment Operations
Investment income, net 0.78** 0.88 0.29
Net realized and unrealized gain (loss) on investments, financial
futures and swap contracts and foreign currency-related transactions 0.05 (1.86) (0.41)
- - -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.83 (0.98) (0.12)
- - -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions
From investment income, net 0.87 0.76 0.29
From capital stock in excess of par value -- 0.13 --
- - -----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.87 0.89 0.29
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.68 $7.72 $9.59
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Return 11.73% (10.50%) (1.20%) (b)
Ratios/Supplemental Data
Net assets, end of period (000's) $128,419 $164,709 $111,043
Ratio of operating expenses to average net assets,
exclusive of interest expense 1.01% 1.00% 1.03% (a)
Ratio of operating expenses to average net assets,
inclusive of interest expense 1.07% 1.15% 1.03% (a)
Ratio of investment income, net to average net assets 10.44% 10.52% 7.87% (a)
Portfolio Turnover 137% 157% 16%
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Not annualized.
* Commencement of Operations.
** Calculation done based on average shares outstanding.
48
<PAGE>
SHAREHOLDER INQUIRIES
This Prospectus contains a concise statement of information investors should
know before they invest in a Portfolio. Please retain this Prospectus for future
reference. Additional information about a Portfolio's investments is available
in such Portfolio's annual and semi-annual reports to shareholders, as well as
the Statement of Additional Information (SAI) dated May 1, 2000. The SAI
provides more detailed information about the Portfolios, including their
operations and investment policies. A current SAI is on file with the Securities
and Exchange Commission and is incorporated by reference and is legally
considered a part of this Prospectus. In each Portfolio's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Portfolio's performance during its last fiscal year.
A Portfolio's SAI, annual and semi-annual reports are available, without charge,
upon request by contacting Investors Capital, 600 Fifth Avenue, New York, NY
10020, (800) 762-4848.
Information about a Portfolio (including the SAI) can be reviewed and copied at
the Commission's Public Reference Room in Washington D.C. Information on the
operation of the public reference room may be obtained by calling the Commission
at 1-202-942-8090. Reports and other information about the Portfolios are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington D.C. 20549-0102 or by
electronic request at the following e-mail address: [email protected].
DISTRIBUTED BY:
FIRST FUND DISTRIBUTORS, INC.
Fund's Investment Company Act filing number: 811-5796
<PAGE>
FFTW FUNDS, INC.
----------------------------------------------
----------------------------------------------
PROSPECTUS
LIMITED DURATION PORTFOLIO
----------------------------------------------
----------------------------------------------
MAY 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE PORTFOLIO'S SHARES
AS AN INVESTMENT OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
CONTENTS
Risk/Return Summary 3
Investment Objectives, Principal Investment Strategies and Investments 3
Principal Investment Risks 4
Risk/Return Bar Chart and Table 5
Fee Table 6
Expense Table Example 6
Fund Management 6
Shareholder Information 7
Investment Information 11
Portfolio Turnover 21
Supplemental Investment Policies 21
Financial Highlights Table 22
Shareholder Inquiries 23
<PAGE>
RISK/RETURN SUMMARY
The following is a summary of certain key information about the Limited Duration
Portfolio (the "Portfolio"), including investment objectives, principal
investment strategies and principal investment risks. A more detailed
description of the permitted investment strategies, permitted investments and
their associated risks will follow.
<PAGE>
<TABLE>
<CAPTION>
Investment Objectives, Principal Investment
Strategies and Investments
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO
- - -------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT OBJECTIVE: To maintain a level of total return as may be consistent with the
preservation of capital.
- - -------------------------------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa by
STRATEGIES: Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) debt securities, using interest rate hedging
as a stabilizing technique. The performance objective of the Portfolio is to
outperform the Merrill Lynch 1-2.99 Year Treasury Index.
- - -------------------------------------------------------------------------------------------------------------
MINIMUM QUALITY RATING: S&P Moody's AVERAGE
S&P: Moody's: (Short (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- Term): ------------- --------- ------------------
------
BBB- Baa3 A-2 P-2 B AA (Aa)
- - -------------------------------------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration generally is shorter
than three years. The average U.S. dollar-weighted duration of the Portfolio
will not differ from the average duration of the Merrill Lynch 1-2.99
Treasury Index by more than one year. As of December 31, 1999, the duration
of the Merrill Lynch 1-2.99 Treasury Index was 1.6 years.
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in U.S.
dollar-denominated securities. For temporary defensive purposes, 100% of the
Portfolio's total assets may be invested in U.S. Government securities, cash
or cash equivalent securities. These defensive strategies may prevent the
Portfolio from achieving its investment objective. The Portfolio is
"non-diversified" under the 1940 Act.
- - -------------------------------------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS: Asset-Backed Securities
(See Permitted Bank Obligations
Investment Strategies, Corporate Debt Instruments
Investments and Mortgage-Backed Securities
Associated Risks for a Repurchase and Reverse Repurchase Agreements
more detailed Total Return Swaps
description) U.S. Government and Agency Securities
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PRINCIPAL INVESTMENT RISKS
"Risk" is the chance that you may lose money on an investment or that you will
not earn as much as you expect. The greater the risk, the greater the
possibility of losing money.
The Portfolio is affected by changes in the economy, or in securities and other
markets.
The possibility also exists that investment decisions of portfolio managers will
not accomplish what they are designed to achieve. No assurance can be given that
the Portfolio's investment objective will be achieved.
The Portfolio may invest in securities issued by the U.S. Government, its
agencies or sponsored enterprises. Some of these securities are backed by the
full faith and credit of the United States and others are subject to varying
degrees of risk.
Investments in the Portfolio are subject to certain of the following risks.
BANKING Investing in bank obligations will expose the Portfolio to risks
INDUSTRY associated with the banking industry such as interest rate and
RISK: credit risks.
CORRELATION Derivatives are financial instruments whose value depends upon,
RISK: or is derived from, the value of something else, such as one or
more underlying securities, indexes or currencies. The prices of
a particular derivative instrument may not move in the same way
as the underlying security or, in the case of a hedging
transaction, of the securities which are the subject of a hedge.
CREDIT RISK: The Portfolio may be exposed to the risk that a security's issuer
or a counterparty to a contract will default or not be able to
honor a financial obligation.
HEDGING Hedging is commonly used as a buffer against a perceived
RISK: investment risk. Hedging exposes the Portfolio to the risk that
the hedge will lose value while the hedged investment increases
in value.
INTEREST RATE Investing in fixed-rate debt securities will expose the Portfolio
RISK: to the risk that the value of the Portfolio's investments will
decline if interest rates rise.
LEVERAGE The use of derivatives exposes the Portfolio to the risk of
RISK: leverage which may result in greater fluctuations in the
Portfolio's net asset value than would have occurred had the
Portfolio invested in the underlying security.
LIQUIDITY Certain securities may be difficult or impossible to sell at
RISK: favorable prices within the desired time frame.
MARKET RISK: The market value of a security may increase or decrease over
time. Such fluctuations can cause a security to be worth less
than the price originally paid for it or less than it was worth
at an earlier time. Market risk may affect a single issuer,
entire industry or the market as a whole.
NON- A non-diversified Portfolio may invest more of its assets in the
DIVERSIFICA- securities of fewer companies than a diversified Portfolio. This
TION RISK: vulnerability to factors affecting a single investment can result
in greater Portfolio losses and volatility.
PREPAYMENT A Portfolio that invests in mortgage-backed and other
RISK: asset-backed securities is exposed to the risk that such
securities may repay principal either faster or slower than
expected.
<PAGE>
RISK/RETURN BAR CHART AND TABLE
The chart and table provided below give some indication of the risks of
investing in the Portfolio. The chart and table illustrate the changes in the
Portfolio's yearly performance and show how the Portfolio's average returns
for 1 year, 5 years and since inception compare with a selected index. Past
performance is not necessarily an indication of how a Portfolio will perform
in the future.
LIMITED DURATION PORTFOLIO
AVERAGE ANNUAL TOTAL RETURN
[CHART]
<TABLE>
<CAPTION>
YEAR RETURN
- - ---------------------------------------
<S> <C>
12/31/94 0.29%
12/31/95 11.26%
12/31/96 5.29%
12/31/97 7.21%
12/31/98 6.79%
12/31/99 2.88%
</TABLE>
During the six-year period shown in the Limited Duration Portfolio's bar chart,
the highest quarterly return was 3.53% (quarter ending 3/31/95) and the lowest
quarterly return was -0.47% (quarter ending 3/31/94).
<PAGE>
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(FOR THE PERIODS ENDING DECEMBER 31, 1999) (7/26/93)
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Duration Portfolio 2.88% 6.64% 5.46%
- - -------------------------------------------------------------------------------------------------------------
Merrill Lynch 1-2.99 Year Treasury Index 3.06% 6.50% 5.41%
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
FEE TABLE
This Table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
SHAREHOLDER FEES(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
None
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.35%
------------------------------------------------------------------------------------------
Distribution Fees (12b-1) None
------------------------------------------------------------------------------------------
Other Expenses 0.19%
------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses* 0.54%
------------------------------------------------------------------------------------------
</TABLE>
*The Investment Adviser and Investors Capital (the "Administrator") have
voluntarily agreed to cap the Net Operating Expenses at 0.30% (on an
annualized basis) of the Portfolio's average daily net assets. All operating
expenses exceeding caps and voluntary waiver will be paid by the Investment
Advisor or Administrator as applicable. The Investment Adviser and the
Administrator will not attempt to recover prior period waivers should
expenses fall below the cap. For the fiscal year ended 12/31/99, the
Investment Adviser waived fees in the amount of 0.24%. All operating expenses
exceeding the voluntary waiver of fees will be paid by the Investment
Adviser. Under an Administration Agreement effective May 29, 1998, between
the Fund and the Administrator, the Administrator provides administrative
services to the Portfolio for an administrative fee and an incentive fee. The
incentive fee is paid to the administrator in the event the Portfolio
operates below its expense ratio. This incentive fee is capped at 0.02% of
the Portfolio's average daily net assets. Such waivers can be terminated at
any time.
EXPENSE TABLE EXAMPLE
The following table is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
$55 $173 $302 $678
- - --------------------------------------------------------------------------------
</TABLE>
FUND MANAGEMENT
BOARD OF DIRECTORS
The Board of Directors of FFTW Funds, Inc. (the "Fund"), is responsible for the
overall management and supervision of the Portfolio, which is a series of the
Fund. The Fund's Directors are Stephen P. Casper, John C Head III, Lawrence B.
Krause, Andrea Redmond, Saul H. Hymans and Onder John Olcay. Additional
information about the Directors and the Fund's executive officers may be found
in the Statement of Additional
<PAGE>
Information under the heading "Management of the Fund."
INVESTMENT ADVISER
Subject to the direction and authority of the Board of Directors, Fischer
Francis Trees & Watts, Inc. ("FFTW" or the "Investment Adviser") serves as
Investment Adviser to the Portfolio. The Investment Adviser continuously
conducts investment research and is responsible for the purchase, sale or
exchange of the Portfolio's assets. Organized in 1972, the Investment Adviser
is registered with the Securities and Exchange Commission and is a New York
corporation, that, with its affiliated companies, currently manages
approximately $30 billion in assets for numerous fixed-income portfolios. The
Investment Adviser currently advises over 125 major institutional clients
including banks, central banks, pension funds and other institutional
clients. The average size of a client relationship with the Investment
Adviser is in excess of $200 million. The Investment Adviser also serves as
the sub-adviser to three portfolios of two other open-end management
investment companies. The Investment Adviser's offices are located at 200
Park Avenue, New York, New York 10166. The Investment Adviser is directly
wholly-owned by Charter Atlantic Corporation, a New York corporation. The
Portfolio paid the Investment Adviser for its services in the twelve months
ended December 31, 1999, at a rate of 0.15% of the Portfolio's average daily
net assets.
PORTFOLIO MANAGERS
FFTW uses a team approach for making the strategic and sector allocations
within each of its model Portfolios. For each Portfolio, a specific portfolio
manager is responsible for portfolio implementation and compliance with
Portfolio-specific and FFTW-wide investment strategy. The portfolio manager
determines the broad risk parameters under which the Portfolio operates, but
relies on specialist investment teams for the generation of ideas and
specific investments in the Portfolio. The following groups and teams assist
in the selection of specific investments, subject to the Portfolio's
investment policies and restrictions: the Duration, Country and Foreign
Exchange Strategy Group, consisting of the Foreign Exchange, U.S. Bloc,
Europe and Japan teams, and the Sector Allocation Strategy Group, consisting
of the Global Credit, Mortgages and Emerging Markets teams.
ADNAN AKANT, MANAGING DIRECTOR. Mr. Akant joined FFTW in 1984, after six
years with the World Bank, where he served as a project financial analyst in
Europe and the Middle East area before joining the treasurer's staff as an
investment officer. As a member of the investment department at the World
Bank, Mr. Akant was responsible for investment and trading of each of the
major sectors of the bank's actively managed liquidity portfolio. He was also
a member of the investment strategy committee and shared responsibility for
formulating and implementing the bank's trading and investment strategy. Mr.
Akant was later promoted to senior investment officer, and was the division's
deputy in charge of the U.S. dollar portfolio. Mr. Akant holds a Ph.D. in
systems science, an M.S. in finance and international management, an
Engineer's degree, and M.S. and B.S. degrees in electrical engineering, all
from the Massachusetts Institute of Technology. Mr. Akant also taught
graduate and undergraduate level courses as a teaching assistant. Mr. Akant
is a member of the New York Academy of Sciences, IEEE, and of the Sigma XI,
Tau Beta Pi, and Eta Kappa Nu honor societies.
JEFFREY HOLTMAN, PORTFOLIO MANAGER. Mr. Holtman is responsible for management
of the Limited Duration Portfolio and other Portfolios of FFTW Funds, Inc.
Mr. Holtman joined FFTW in May 1996 after two years with J.P. Morgan as a
credit risk analyst. Currently, he manages all domestic asset-backed
securities and is also responsible for short-intermediate duration
portfolios. At J.P. Morgan, Mr. Holtman was responsible for evaluating credit
risk and portfolio suitability analysis in the equity research group. Mr.
Holtman received a B.S. in Industrial Management and Economics from Carnegie
Mellon University (1994).
<PAGE>
SHAREHOLDER INFORMATION
PURCHASES
Portfolio shares may be purchased directly from the Portfolio, or obtained by
employing the services of an outside broker or agent. Such broker or agent may
charge a fee for its services. The minimum initial investment in the Portfolio,
if shares are purchased directly from the Portfolio, is $100,000; such minimum
may be waived at the discretion of FFTW or the distributor, First Fund
Distributors, Inc. ("First Fund" or the "Distributor"). Subsequent investments
or redemptions may be of any amount. Initial investments, if obtained through a
broker or agent may be for amounts lower than $100,000. There are no loads or
12b-1 distribution fees imposed by the Portfolio. Shares purchased will begin
accruing dividends on the day Federal funds are received.
Purchases of shares may be made on any "Business Day," meaning, any Monday
through Friday that the New York Stock Exchange is open. At the present time,
the New York Stock Exchange is closed on: New Year's Day, Dr. Martin Luther
King's Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
WIRING INSTRUCTIONS:
To: Investors Bank & Trust Company, Boston, Massachusetts
ABA Number: 011001438
Account Name: First Fund Distributors, Inc. - Fund Purchase Account
Account Number: 933333333
Reference: Limited Duration Portfolio
TO PURCHASE SHARES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
WHEN NET ASSET WHEN & HOW PROCEDURE FOR SAME DAY RESULT OF LATE NOTIFICATION OR
VALUE (NAV) SHARES MAY BE PURCHASES DELAY IN RECEIPT OF FUNDS
IS DETERMINED PURCHASED
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
All Business - Any Business - Purchasers must call - The Portfolio must receive notice
Days Day Investors Capital at (800) before 4 p.m. (wire may be received
762-4848, or (212) 335-5211 after 4 p.m. ET) for shares to be
- Submitted if within the City of New bought at that day's price.
orders must York, or Investors Bank at
include a (800) 247-0473 prior to 4:00
completed p.m. ET to inform the - Shares will be bought at the next
account Portfolio of the incoming business day's price if wire is
application. wire transfer. received after 4:00 p.m. ET and
no notice is given.
- Federal funds - Purchasers must indicate
must be wired which Portfolio is to be
to First Fund's purchased.
"Fund Purchase
Account" at - If Federal funds are received
Investors Bank by the Portfolio that day,
& Trust the order will be effective that
Company day. Price of shares is based
("Investors Bank"). on the next calculation of NAV
after the order is placed.
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
REDEMPTIONS
All Portfolio shares (fractional and full) will be redeemed upon shareholder
request. The redemption price will
<PAGE>
be the next net asset value per share, determined after the Transfer Agent
receives proper notice of redemption (see table below). Shares redeemed
receive dividends declared up to, and including the day preceding the day of
the redemption payment.
Shares may be redeemed by employing the services of an outside broker or agent
or may be redeemed directly from the Portfolio. Such broker or agent may charge
a fee for its services. There are no loads or 12b-1 distribution fees imposed by
the Portfolio. No charge is imposed by the Portfolio to redeem shares, however,
a shareholder's bank may impose its own wire transfer fee for receipt of the
wire. The Fund may execute redemptions in any amount requested by the
shareholder up to the amount the shareholder has invested in the Portfolio.
A shareholder may change its authorized agent or the account designated to
receive redemption proceeds at any time by writing to the Transfer Agent with an
appropriate signature guarantee. Further documentation may be required when
deemed appropriate by the Transfer Agent.
A telephone redemption option is made available to shareholders on the
Portfolio's Account Application. The Portfolio or the Transfer Agent may employ
procedures designed to confirm that instructions communicated by telephone are
genuine. If the Portfolio does not employ such procedures, it may be liable for
losses due to unauthorized or fraudulent instructions. The Portfolio or the
Transfer Agent may require personal identification codes and will only wire
funds through pre-existing bank account instructions. No bank instruction
changes will be accepted via telephone.
In an attempt to reduce expenses, the Portfolio may redeem shares of any
shareholder whose Portfolio account has a net asset value lower than $100,000. A
shareholder's account may be involuntarily redeemed should its account value
fall below minimum investment requirements. An involuntary redemption will not
occur when drops in investment value are the sole result of adverse market
conditions. The Portfolio will give 60 days prior written notice to shareholders
whose shares are being redeemed to allow them to purchase sufficient additional
shares of the Portfolio to avoid such redemption. The Portfolio also may redeem
shares in a shareholder's account as reimbursement for loss due to the failure
of a check or wire to clear in payment of shares purchased.
TO REDEEM SHARES
- - --------------------------------------------------------------------------------
1. SHAREHOLDERS MUST PROVIDE THE FOLLOWING INFORMATION:
a. The dollar or share amount to be redeemed;
b. The account to which the redemption proceeds should be wired (this
account will have been previously designated by the shareholder on its
Account Application Form);
c. The name of the shareholder; and
d. The shareholder's account number
2. SHAREHOLDERS SHOULD CALL THE TRANSFER AGENT AT (800) 247-0473 OR INVESTORS
CAPITAL SERVICES AT (800) 762-4848 TO REQUEST A REDEMPTION.
3. IN THE CASE OF FOREIGN EXCHANGES, THE PORTFOLIO'S NAV MAY CHANGE WHEN
SHAREHOLDERS CANNOT BUY OR SELL SHARES.
- - --------------------------------------------------------------------------------
WHEN REDEMPTION EFFECTIVE RESULT OF LATE NOTIFICATION OF REDEMPTION
- - --------------------------------------------------------------------------------
<PAGE>
- - --------------------------------------------------------------------------------
If notice is received by the Transfer If notice is received by the Transfer
Agent by 4:00 p.m. ET on any Business Agent on a non-business day or after
Day, the redemption will be effective 4:00 p.m. ET on a Business Day, the
and payment will be made within seven redemption notice will be deemed
calendar days, but generally two received as of the next Business Day.
business days following receipt of such
notice. Price of shares is based on
the next calculation of the NAV after
the order is placed.
- - --------------------------------------------------------------------------------
PRICING OF PORTFOLIO SHARES
Your price for Portfolio shares is the Portfolio's net asset value per share.
Portfolio net asset value is calculated by: (1) adding the market value of all
the Portfolio's assets, (2) subtracting all of the Portfolio's liabilities, and
then (3) dividing by the number of shares outstanding and adjusting to the
nearest cent. The net asset value is calculated by the Portfolio's Accounting
Agent as of 4:00 p.m. ET on each Business Day.
All Portfolio investments are valued daily at their market price, which
results in unrealized gains or losses. Readily marketable fixed-income
securities are valued on the basis of prices provided by a pricing service
when such prices are believed by the Investment Adviser to reflect the fair
value of such securities. Securities traded on an exchange are valued at
their last sales price on that exchange. Securities and other financial
instruments for which over-the-counter market quotations are available are
valued at the latest bid price (asked price for short sales). Time deposits
and repurchase agreements are generally valued at their cost plus accrued
interest. Securities for which market quotations are not readily available
will be valued in good faith by methods approved by the Board of Directors.
Securities with maturities less than 60 days are valued at amortized cost,
which approximates market value, unless this method does not represent fair
value.
DIVIDENDS
If desired, shareholders must request to receive dividends in cash (payable
on the first Business Day of the following month) on the Account Application
Form. Absent such notice, all dividends will be automatically reinvested in
additional shares on the last Business Day of each month at the share's net
asset value. In the event that the Portfolio realizes net short- or long-term
capital gains (i.e., with respect to assets held more than one year), the
Portfolio will distribute such gains by automatically reinvesting (unless a
shareholder has elected to receive cash) them in additional Portfolio shares.
Net investment income (including accrued but unpaid interest, amortization of
original issue and market discount or premium) of the Portfolio will be declared
as dividends payable daily to the respective shareholders of record as of the
close of each Business Day.
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other shareholder voting matters. Matters to be acted upon affecting the
Portfolio (such as approval of the investment advisory
<PAGE>
agreement with the Investment Adviser or the submission of changes to
fundamental Portfolio investment policy) require the affirmative vote of the
Portfolio shareholders. The election of the Fund's Board of Directors and the
approval of the Fund's independent auditors are voted upon by shareholders on a
Fund-wide basis. The Fund is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Fund's or
the Portfolio's operation and for the election of Directors under certain
circumstances. Directors may be removed by shareholders at a special meeting.
The Directors shall call a special meeting of the Portfolio upon written request
of shareholders owning at least 10% of the Portfolio's outstanding shares.
TAX CONSIDERATIONS
The following discussion is for general information only. An investor should
consult with his or her own tax adviser as to the tax consequences of an
investment in the Portfolio, including the status of distributions from the
Portfolio under applicable state or local law. For additional information
regarding tax issues pertaining to the Portfolio, see "Supplemental Tax
Considerations" in the Statement of Additional Information.
FEDERAL INCOME TAXES
The Portfolio will distribute all of its taxable income by automatically
reinvesting such income in additional Portfolio shares and distributing those
shares to its shareholders, unless a shareholder elects on the Account
Application Form to receive cash payments for such distributions. Shareholders
receiving distributions from the Portfolio in the form of additional shares will
be treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such a distribution.
Dividends the Portfolio pays from its investment company taxable income
(including interest and net short-term capital gains) will be taxable to U.S.
shareholders as ordinary income, whether received in cash or in additional
Portfolio shares. Designated distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses) are generally
taxable to shareholders at the applicable long-term capital gains rates,
regardless of how long they have held their Portfolio shares. If a portion of
the Portfolio's income consists of dividends paid by U.S. corporations, a
portion of the dividends paid by the Portfolio may be eligible for the corporate
dividends-received deduction.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by the Portfolio in October, November or December with a
record date in any such month and paid by the Portfolio during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. The Portfolio will inform
shareholders of the amount and tax status of all amounts treated as distributed
to them not later than 60 days after the close of each calendar year.
If a shareholder holds shares through a tax-deferred account, such as a
retirement plan, income and gains will not be taxable each year. Instead, the
taxable portion of amounts held in a tax-deferred account generally will be
subject to tax only when a distribution is made from that account.
A shareholder who sells or redeems Portfolio shares will generally realize a
capital gain or loss, which will be long-term or short term, generally depending
upon the shareholder's holding of the shares. An exchange of shares may be
treated as a sale.
As with all mutual funds, a Portfolio may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who:
1. fail to provide the Portfolio with a correct taxpayer identification
number, or
2. fail to make required certifications, or
3. have been notified by the IRS that they are subject to backup withholding.
Backup withholding is not an additional tax; rather, it is a way in which the
IRS ensures it will collect taxes otherwise due. Any amount withheld may be
credited against U.S. federal income tax liability.
<PAGE>
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the Portfolio and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Portfolio or its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors in the
Portfolio should consult their tax advisers with specific reference to their own
tax situation.
STATE AND LOCAL TAXES
The Portfolio may be subject to state, local or foreign taxation in any
jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes. Portfolio
distributions derived from interest on obligations of the U.S. Government and
certain of its agencies, authorities and instrumentalities may be exempt from
state and local taxes in certain states. Shareholders should consult their own
tax advisers regarding possible state and local income tax exclusions for
dividend portions paid by the Portfolio, which are attributable to interest from
obligations of the U.S. Government, its agencies, authorities and
instrumentalities.
DISTRIBUTION OF PORTFOLIO SHARES
Shares of the Portfolio are distributed by First Fund pursuant to a
Distribution Agreement dated as of January 1, 2000 by and among the Fund,
Investors Bank & Trust Company and First Fund. No fees are payable by the
Fund pursuant to the Distribution Agreement. Investors Bank & Trust Company
pays the distribution fee while FFTW pays all other fees and expenses related
to distribution.
INVESTMENT INFORMATION
PERMITTED INVESTMENT STRATEGIES, INVESTMENTS AND ASSOCIATED RISKS
Principal Investment Strategies
- - - Asset-backed Securities
- - - Bank Obligations
- - - Corporate Debt Instruments
- - - Duration Management
- - - Hedging
- - - Mortgage-Backed Securities
- - - Repurchase and Reverse Repurchase Agreements
- - - Total Return Swaps
- - - U.S. Government and Agency Securities
Other Investments
- - - Dollar Roll Transactions
- - - Foreign Instruments
- - - Illiquid Securities
- - - Inflation-Indexed Securities
- - - Investment Companies
- - - Municipal Investments
- - - Stripped Instruments
<PAGE>
- - - TBA Transactions
- - - When Issued and Forward Commitment Securities
- - - Zero Coupon Securities
ASSET-BACKED SECURITIES
Asset-backed securities are secured by or backed by assets other than
mortgage-related assets, such as automobile and credit card receivables. These
securities are sponsored by such institutions as finance companies, finance
subsidiaries of industrial companies and investment banks. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities, however, the underlying assets are not first lien mortgage loans or
interests, but include assets such as:
a. motor vehicle installment sale contracts,
b. other installment sale contracts,
c. leases of various types of real and personal property, and
d. receivables from revolving credit (credit card) agreements.
RISKS: The principal amount of asset-backed securities is generally
subject to partial or total prepayment risk. If an asset-backed
security is purchased at a premium or discount to par, a prepayment
rate that is faster than expected will reduce or increase,
respectively, the yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect on yield to
maturity. These securities may not have any security interest in the
underlying assets, and recoveries on the repossessed collateral may
not, in some cases, be available to support payments on these
securities.
BANK OBLIGATIONS
Bank obligations are bank issued securities. These instruments include, but
are not limited to:
<TABLE>
<S> <C> <C>
a. Time Deposits, e. Deposit Notes, h. Variable Rate Notes,
b. Certificates of Deposit, f. Eurodollar Time deposits, i. Loan Participations,
c. Bankers' Acceptances, g. Eurodollar Certificates of Deposit, j. Variable Amount Master Demand Notes,
d. Bank Notes, k. Yankee CDs, and
l. Custodial Receipts
</TABLE>
RISKS: Investing in bank obligations exposes the Portfolio to risks
associated with the banking industry such as interest rate and credit
risks.
<PAGE>
BRADY BONDS
Brady Bonds are debt securities, issued or guaranteed by foreign governments in
exchange for existing external commercial bank indebtedness. To date, over
$109 billion (face amount) of Brady Bonds have been issued by the governments
of seventeen countries, the largest proportion having been issued by Argentina,
Brazil, Mexico and Venezuela. Brady Bonds are either collateralized or
uncollateralized, issued in various currencies (primarily the U.S. dollar), and
are actively traded in the over-the-counter secondary market.
The Portfolio may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
RISKS: Brady Bonds are generally issued by countries with developing
capital markets or unstable governments and as such, are considered to
be among the more risky international investments.
CONVERTIBLE SECURITIES
Convertible bonds or shares of convertible preferred stock are securities that
may be converted into, or exchanged for, underlying shares of common stock,
either at a stated price or stated rate. Convertible securities have general
characteristics similar to both fixed income and equity securities.
RISKS: Typically, convertible securities are callable by the company,
which may, in effect, force conversion before the holder would
otherwise choose. If the issuer chooses to convert the security, this
action could have an adverse effect on the Portfolio's ability to
achieve its objectives.
CORPORATE DEBT INSTRUMENTS
Corporate bonds are debt instruments issued by private corporations. As
creditors, bondholders have a prior legal claim over common and preferred
stockholders of the corporation as to both income and assets for the
principal and interest due to the bondholder. The Portfolio purchases
corporate bonds subject to quality restraints. Commercial paper, notes and
other obligations of U.S. and foreign corporate issuers (including
medium-term and variable rate notes) must meet the Portfolio's credit quality
standards. The Portfolio may retain a downgraded corporate debt security if
the Investment Adviser determines retention of such security to be in the
Portfolio's best interests.
RISKS: Investing in corporate debt securities subjects the Portfolio
to interest rate changes and credit risks.
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions consist of the sale of mortgage-backed securities, with
a commitment to purchase similar, but not identical securities at a future date,
and at the same price. The Portfolio will maintain a segregated custodial
account for dollar roll transactions. The segregated accounts may contain cash,
U.S. Government Securities or other liquid, unencumbered securities having an
aggregate value at least equal to the amount of such commitments to repurchase
the securities under the dollar roll transaction (including accrued interest).
RISKS: Should the broker-dealer to whom the Portfolio sells an
underlying security of a dollar roll transaction become insolvent, the
Portfolio's right to purchase or repurchase the security may be
restricted, or the price of the security may change adversely over the
term of the dollar roll transaction.
DURATION MANAGEMENT
Duration measures a bond's price volatility, incorporating the following
factors:
<PAGE>
a. the bond's yield,
b. coupon interest payments,
c. final maturity,
d. call features, and
e. prepayment assumptions.
Duration measures the expected life of a debt security on a present value basis.
It incorporates the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled (or in the case
of a callable bond, expected to be received) and weighs them by the present
values of the cash to be received at each future point in time. For any debt
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, for the same maturity, the
lower the stated or coupon rate of interest of a debt security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a debt security, the shorter the duration of the security.
Futures, options and options on futures have durations closely related to the
duration of the securities that are underlying them. Holding long futures or
call options will lengthen the Portfolio's duration by approximately the same
amount that holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions and have the
effect of reducing duration by approximately the same amount that selling an
equivalent amount of the underlying securities would. The market price of a bond
with a duration of two years would be expected to decline 2% if interest rates
rose 1%. If a bond has an effective duration of three years, a 1% increase in
general interest rates would be expected to cause the bond's value to decline by
about 3%.
RISKS: Changes in weighted average duration of the Portfolio's holdings
are not likely to be so large as to cause them to fall outside the
ranges specified above. There is no assurance that deliberate changes
in the Portfolio's weighted average duration will enhance its return
relative to more static duration policies or Portfolio structures. In
addition, it may detract from its relative return.
FOREIGN INSTRUMENTS a. FOREIGN SECURITIES Foreign securities are securities
denominated in currencies other than the U.S. dollar and may be denominated
in any single currency or multi-currency units. The Investment Adviser will
adjust exposure of the Portfolio to different currencies based on its
perception of the most favorable markets and issuers. In allocating assets
among multiple markets for the Portfolio, the Investment Adviser will assess
the relative yield and anticipated direction of interest rates in particular
markets, general market and economic conditions and the relationship of
currencies of various countries to each other. It is further anticipated that
such securities will be issued primarily by governmental and private entities
located in such countries and by supranational entities. The Portfolio will
only invest in countries considered to have stable governments, based on the
Investment Adviser's analysis of social, political, and economic factors.
b. FOREIGN GOVERNMENT, INTERNATIONAL AND SUPRANATIONAL AGENCY SECURITIES
These securities include debt obligations issued or guaranteed by a foreign
government or its subdivisions, agencies and instrumentalities, international
agencies and supranational entities.
RISKS: Generally, foreign financial markets have substantially less
volume than the U.S. market. Securities of many foreign companies are
less liquid, and their prices are more volatile than securities of
comparable domestic companies. The Portfolio may invest portions of its
assets in securities denominated in foreign currencies. These
investments carry risks of fluctuations of exchange rates relative to
the U.S. dollar. Securities issued by foreign entities (governments,
corporations etc.) may involve risks not associated with U.S.
investments, including expropriation of assets, taxation, political or
social instability and low financial reporting standards--all of which
may cause declines in investment returns.
HEDGING
Hedging techniques are used to offset certain investment risks. Such risks
include: changes in interest rates,
<PAGE>
changes in foreign currency exchange rates and changes in securities and
commodity prices. Hedging techniques are commonly used to minimize a given
instrument's risks of future gain or loss. Hedging techniques include:
<TABLE>
<S> <C>
a. engaging in swaps; d. purchasing and selling futures contracts; and
b. purchasing and selling caps, floors and collars; e. purchasing and selling options.
c. purchasing or selling forward exchange contracts;
</TABLE>
All hedging instruments described below constitute commitments by the Portfolio
and therefore require the Portfolio to segregate cash (in any applicable
currency), U.S. Government securities or other liquid and unencumbered
securities (in any applicable currency) equal to the amount of the Portfolio's
obligations in a separate custody account.
When the Portfolio purchases a futures or forward currency contract for
non-hedging purposes, the sum of the segregated assets plus the amount of
initial and variation margin held in the broker's account, if applicable, must
equal the market value of the futures or forward currency contract.
When the Portfolio sells a futures or forward currency contract for non-hedging
purposes, the Portfolio will have the contractual right to acquire:
1. the securities,
2. the foreign currency subject to the futures, or
3. the forward currency contract.
The Portfolio will segregate assets, in an amount at least equal to the market
value of the securities or foreign currency underlying the futures or forward
currency contract.
Should the market value of the contract move adversely to the Portfolio, or if
the value of the securities in the segregated account declines, the Portfolio
will be required to deposit additional cash or securities in the segregated
account at a time when it may be disadvantageous to do so.
The Portfolio will not enter into any swaps, caps or floors unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either A or A-1 or better by S&P or A or P-1 or better by Moody's. If
unrated, it must be determined to be of comparable quality by the Investment
Adviser.
a. SWAPS
Swaps are commonly used for hedging purposes. Hedging involving mortgage and
interest rate swaps may enhance total return. Interest rate swaps involve the
Portfolio's exchange with another party of their respective commitments to pay
or receive interest, such as an exchange of fixed rate payments for floating
rate payments. Mortgage swaps are similar to interest rate swaps, both represent
commitments to pay and receive funds. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
b. CAPS, FLOORS AND COLLARS
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar incorporates a cap and
a floor in one transaction as described above.
c. FORWARD FOREIGN EXCHANGE CONTRACTS
<PAGE>
A forward foreign exchange contract is the purchase or sale of a foreign
currency, on a specified date, at an exchange rate established before the
currency's payment and delivery to hedge the currency exchange risk
associated with its assets or obligations denominated in foreign currencies.
Synthetic hedging is a technique utilizing forward foreign exchange contracts
that is frequently employed by the Portfolio. It entails entering into a
forward contract to sell a currency, the changes in value of which are
generally considered to be linked to a currency or currencies in which some
or all of the Portfolio's securities are or are expected to be denominated,
and buying U.S. dollars. There is a risk that the perceived linkage between
various currencies may not be present during the particular time that the
Portfolio is engaging in synthetic hedging. The Portfolio may also
cross-hedge currencies by entering into forward contracts to sell one or more
currencies that are expected to decline in value relative to other currencies
to which the Portfolio has or expects to have exposure.
d. FUTURES CONTRACTS
A futures contract is an agreement to buy or sell a specific amount of a
financial instrument at a particular price on a specified date. The futures
contract obligates the buyer to purchase the underlying commodity and the seller
to sell it. Losses from investing in futures transactions that are unhedged or
uncovered are potentially unlimited. Substantially all futures contracts are
closed out before settlement date or called for cash settlement. A futures
contract is closed out by buying or selling an identical offsetting futures
contract that cancels the original contract to make or take delivery. At times,
the ordinary spreads between values in the cash and futures markets, due to
differences in the character of these markets, are subject to distortions. The
possibility of such distortions means that a correct forecast of general market,
foreign exchange rate or interest rate trends may not produce the Portfolio's
intended results.
e. OPTIONS CONTRACTS
An option is a contractual right, but not an obligation, to buy (call) or sell
(put) property that is guaranteed in exchange for an agreed upon sum. If the
right is not exercised within a specified period of time, the option expires and
the option buyer forfeits the amount paid. An option may be a contract that
bases its value on the performance of an underlying bond. When the Portfolio
writes a call option, it gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open. A put option gives the purchaser, in return for
a premium, the right, for a specified period or time, to sell the securities or
currency subject to the option to the writer of the put at the specified
exercise price. The writer of the put option, in return for the premium, has the
obligation, upon exercise of the option, to acquire the securities or currency
underlying the option at the exercise price. The Portfolio might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
RISKS: Hedging involves risks of imperfect correlation in price
movements of the hedge and movements in the price of the hedged
security. If interest or currency exchange rates do not move in the
direction of the hedge, the Portfolio will be in a worse position than
if hedging had not been employed. As a result, it will lose all or part
of the benefit of the favorable rate movement due to the cost of the
hedge or offsetting positions. Hedging transactions not entered into on
a U.S. or foreign exchange may subject the Portfolio to exposure to the
credit risk of its counterparty. Futures and options transactions
entail special risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the
related Portfolio position could create the possibility that losses
will be greater than gains in the value of the Portfolio's position.
Other risks include the risk that the Portfolio could not close out a
futures or options position when it would be most advantageous to do
so.
ILLIQUID SECURITIES
Illiquid securities cannot be sold or disposed of in the ordinary course of
business within seven days for approximately the value at which the Portfolio
has valued the securities. These include:
1. securities with legal or contractual restrictions on resale,
2. time deposits, repurchase agreements and dollar roll transactions having
maturities longer than seven days,
<PAGE>
and
3. securities not having readily available market quotations.
Although the Portfolio is allowed to invest up to 15% of the value of its net
assets in illiquid assets, it is not expected that the Portfolio will invest
a significant portion of its assets in illiquid securities. The Investment
Adviser monitors the liquidity of such restricted securities under the
supervision of the Board of Directors.
The Portfolio may purchase securities not registered under the Securities Act of
1933 as amended (the "1933 Act"), but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act. The Portfolio
may also invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the 1933 Act
(Section 4(2) paper). Section 4(2) paper is restricted as to disposition under
the federal securities laws, and generally is sold to institutional investors.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
is normally resold to other institutional investors through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not determined
to be liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The Investment Adviser will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors.
RISKS: Investing in illiquid securities presents the potential risks
of tying up the Portfolio's assets at a time when liquidating assets
may be necessary to meet debts and obligations.
INDEXED NOTES, CURRENCY EXCHANGE-RELATED SECURITIES AND SIMILAR SECURITIES
These securities are notes, the principal amount of which and/or the rate of
interest payable is determined by reference to an index. This index may be
determined by the rate of exchange between the specified currency for the note
and one or more other currencies or composite currencies.
RISKS: Foreign currency markets can be highly volatile and are subject
to sharp price fluctuations. A high degree of leverage is typical for
foreign currency instruments in which the Portfolio may invest.
INFLATION-INDEXED SECURITIES
Inflation-indexed securities are linked to the inflation rate from worldwide
bond markets such as the U.S. Treasury Department's "inflation-protection"
issues. The initial issues are ten year notes, which are issued quarterly. Other
maturities will be sold at a later date. The principal is adjusted for inflation
(payable at maturity) and the semi-annual interest payments equal a fixed
percentage of the inflation adjusted principal amount. The inflation adjustments
are based upon the Consumer Price Index for Urban Consumers. These securities
may be eligible for coupon stripping under the U.S. Treasury program. In
addition to the U.S. Treasury's issues, inflation-indexed securities include
inflation-indexed securities from other countries such as Australia, Canada, New
Zealand, Sweden and the United Kingdom.
RISKS: If the periodic adjustment rate measuring inflation falls, the
principal value of inflation-indexed bonds will be adjusted downward,
and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment
of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. The
current market value of the bonds is not guaranteed, and will
fluctuate. The Portfolio many also invest in other inflation related
bonds that may or may not provide a similar guarantee. If a guarantee
of principal is not provided, the adjusted principal value of the bond
repaid at maturity may be less than the original principal.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is limited trading history of these securities,
and there can be no assurance that a liquid market in these
instruments will develop, although one is expected to continue to
evolve. Lack of a liquid market may impose the risk of higher
transaction costs and the possibility that the Portfolio may be forced
to
<PAGE>
liquidate positions when it would not be advantageous to do so.
Finally, there can be no assurance that the Consumer Price Index for
Urban Consumers will accurately measure the real rate of inflation in
the price of goods and services.
INVESTMENT COMPANIES
An investment company is an investment vehicle, which, for a management fee,
invests the pooled funds of investors in securities appropriate for its
investment objectives. Two basic types of investment companies exist:
1. Open end funds: these funds have a floating number of outstanding shares
and will sell or redeem shares at their current net asset value,
2. Closed end funds: these funds have a fixed number of outstanding shares
that are traded on an exchange.
The Portfolio will not invest in any funds classified as "load funds."
The acquiring company may not purchase or otherwise acquire securities in the
acquired company (if no-load) if, immediately after the acquisition, the
acquiring company and any company controlled by it would own in the aggregate
more than 3% of the total outstanding voting stock of the acquired company or
would not otherwise comply with any requirements under the Investment Company
Act of 1940.
The Portfolio may invest in another Portfolio within the FFTW Funds, Inc.
family. This is commonly referred to as cross-portfolio investing. Should such
cross-portfolio investing occur, investors will not be double-charged advisory
fees. The Portfolio in which it is directly invested will only charge investors
an advisory fee.
RISKS: Generally, risks posed by a particular fund will mirror those
posed by the underlying securities. A money market fund has the
highest safety of principal, whereas bond funds are vulnerable to
interest rate movements.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities representing ownership interests in,
or debt obligations secured entirely or primarily by, "pools" of residential or
commercial mortgage loans or other mortgage-backed securities. Mortgage-backed
securities may take a variety of forms, the most common being:
1. Mortgage-pass through securities issued by
a. the Government National Mortgage Association (Ginnie Mae),
b. the Federal National Mortgage Association (Fannie Mae),
c. the Federal Home Loan Mortgage Corporation (Freddie Mac),
d. commercial banks, savings and loan associations, mortgage banks or by
issuers that are affiliates of or sponsored by such entities,
2. Collateralized mortgage obligations (CMOs) which are debt obligations
collateralized by such assets, and
3. Commercial mortgage-backed securities.
The Investment Adviser expects that new types of mortgage-backed securities may
be created offering asset pass-through and asset-collateralized investments in
addition to those described above by governmental, government-related and
private entities. As new types of mortgage-related securities are developed and
offered to investors, the Investment Adviser will consider whether it would be
appropriate for such Portfolio to make investments in them.
CMOs are derivatives collateralized by mortgage pass-through securities. Cash
flows from mortgage pass-through securities are allocated to various tranches in
a predetermined, specified order. Each tranche has a stated maturity - the
latest date by which the tranche can be completely repaid, assuming no
prepayments - and has an average life - the average of the time to receipt of a
principal payment weighted by the size of the principal payment. The average
life is typically used as a proxy for maturity because the debt is amortized,
rather than being paid off entirely at maturity.
<PAGE>
RISKS: The Portfolio may invest in mortgage-backed and other
asset-backed securities carrying the risk of a faster or slower than
expected prepayment of principal which may affect the duration and
return of the security. Portfolio returns will be influenced by
changes in interest rates. Changes in market yields affect the
Portfolio's asset value since Portfolio debt will generally increase
in value when interest rates fall and decrease when interest rates
rise. Compared to debt that cannot be prepaid, mortgage-backed
investments are less likely to increase in value during periods of
declining interest rates and have a higher risk of decline in value
during periods of rising interest rates. Thus, interest rates have an
inverse relationship with corresponding market values. Prices of
shorter-term securities generally fluctuate less in response to
interest rate changes than do longer-term securities.
MULTI-NATIONAL CURRENCY UNIT SECURITIES OR MORE THAN ONE CURRENCY DENOMINATION
Multi-national currency unit securities are tied to currencies of more than one
nation. This includes the European Currency Unit--a "basket" consisting of
specified currencies of the member states of the European Community (a Western
European economic cooperative organization). These securities include securities
denominated in the currency of one nation, although it is issued by a
governmental entity, corporation or financial institution of another nation.
RISKS: Investments involving multi-national currency units are subject
to changes in currency exchange rates which may cause the value of
such invested securities to decrease relative to the U.S. dollar.
MUNICIPAL INSTRUMENTS
Municipal instruments are debt obligations issued by a state or local government
entity. The instruments may support general governmental needs or special
governmental projects. It is not anticipated that such instruments will ever
represent a significant portion of the Portfolio's assets.
RISKS: Investments in municipal instruments are subject to the
municipality's ability to make timely payment. Municipal instruments
may also be subject to bankruptcy protection should the municipality
file for such protection.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Under a repurchase agreement, a bank or securities firm (a dealer in U.S.
Government Securities reporting to the Federal Reserve Bank of New York) or
the Fund's Custodian agrees to sell U.S. Government Securities to the
Portfolio and repurchase such securities from the Portfolio at a later date for
an agreed upon price. Under a reverse repurchase agreement, a primary or
reporting dealer in U.S. Government Securities purchases U.S. Government
Securities from the Portfolio and the Portfolio agrees to repurchase the
securities for an agreed price at a later date.
The Portfolio will maintain a segregated custodial account for its reverse
repurchase agreements. Until repayment is made, the segregated accounts may
contain cash, U.S. Government Securities or other liquid, unencumbered
securities having an aggregate value at least equal to the amount of such
commitments to repurchase (including accrued interest). Repurchase and
reverse repurchase agreements will generally be restricted to those maturing
within seven days.
RISKS: If the other party to a repurchase and/or reverse repurchase
agreement becomes subject to a bankruptcy or other insolvency
proceeding, or fails to satisfy its obligations thereunder, delays may
result in recovering cash or the securities sold, or losses may occur
as to all or part of the income, proceeds or rights in the security.
STRIPPED INSTRUMENTS
Stripped instruments are bonds, reduced to its two components: its rights to
receive periodic interest payments (IOs) and rights to receive principal
repayments (POs). Each component is then sold separately. Such instruments
include:
a. Municipal Bond Strips
b. Treasury Strips
<PAGE>
c. Stripped Mortgage-Backed Securities
RISKS: POs do not pay interest, its return is solely based on payment
of principal at maturity. Both POs and IOs tend to be subject to
greater interim market value fluctuations in response to changes in
interest rates. Stripped Mortgage-Backed Securities IOs run the risk
of unanticipated prepayment which will decrease the instrument's
overall return.
TBA (TO BE ANNOUNCED) TRANSACTIONS
In a TBA transaction, the type of mortgage-backed securities to be delivered is
specified at the time of trade, but the actual pool numbers of the securities
to be delivered are not known at the time of the trade. For example, in a TBA
transaction, an investor could purchase $1 million 30 year mortgage-backed
securities issued by the Federal National Mortgage Association and receive
up to three pools on the settlement date. The pool numbers to be delivered at
settlement will be announced shortly before settlement takes place. Agency
pass-through mortgage-backed securities are usually issued on a TBA basis. The
Portfolio will maintain a segregated custodial account containing cash, U.S.
Government securities or other liquid and unencumbered securities having a value
at least equal to the aggregate amount of the Portfolio's TBA transactions.
RISKS: The value of the security on the date of delivery may be less
than its purchase price, presenting a possible loss of asset value.
<PAGE>
TOTAL RETURN SWAPS
A total return swap is an exchange of one security for another. Unlike a hedge
swap, a total return swap is solely entered into as a derivative investment to
enhance total return.
RISKS: A total return swap may result in the Portfolio obtaining an
instrument, which for some reason, does not perform as well as the
original swap instrument.
U.S. GOVERNMENT AND AGENCY SECURITIES AND GOVERNMENT-SPONSORED
ENTERPRISES/FEDERAL AGENCIES
U.S. Government and agency securities are issued by or guaranteed as to
principal and interest by the U.S. Government, its agencies or instrumentalities
and supported by the full faith and credit of the United States. The Portfolio
also may invest in other securities which may be issued by a U.S.
Government-sponsored enterprise or federal agency, and supported either by its
ability to borrow from the U.S. Treasury or by its own credit standing. Such
securities do not constitute direct obligations of the United States but are
issued, in general, under the authority of an Act of Congress. The universe of
eligible securities in these categories include those sponsored by:
a. U.S. Treasury Department,
b. Farmer's Home Administration,
c. Federal Home Loan Mortgage Corporation,
d. Federal National Mortgage Association,
e. Student Loan Marketing Association, and
f. Government National Mortgage Association.
RISKS: Investing in securities backed by the full faith and credit of
the U.S. Government are guaranteed only as to interest rate and face
value at maturity, not its current market price.
WARRANTS
A warrant is a corporate-issued option that entitles the holder to buy a
proportionate amount of common stock at a specified price. Warrants are freely
transferable and can be traded on the major exchanges.
RISKS: Warrants retain their value only so long as the stock retains
its value. Typically, when the value of the stock drops, the value of
the warrant drops.
WHEN ISSUED AND FORWARD COMMITMENT SECURITIES
The purchase of a when issued or forward commitment security will be recorded on
the date the Portfolio enters into the commitment. The value of the security
will be reflected in the calculation of the Portfolio's net asset value. The
value of the security on delivery date may be more or less than its purchase
price. Generally, no interest accrues to the Portfolio until settlement. The
Portfolio will maintain a segregated custodial account containing cash, U.S.
Government securities or other liquid and unencumbered securities having a value
at least equal to the aggregate amount of the Portfolio's when issued and
forward commitments transactions.
RISKS: The value of the security on the date of delivery may be less
than its purchase price, presenting a possible loss of asset value.
ZERO COUPON SECURITIES
Zero coupon securities are sold at a deep discount from their face value. Such
securities make no periodic interest payments, however, the buyer receives a
rate of return by the gradual appreciation of the security, until it is redeemed
at face value on a specified maturity date.
RISKS: Zero coupon securities do not pay interest until maturity and tend to be
subject to greater interim market value fluctuations in response to interest
rate changes rather than interest paying securities of similar maturities.
Credit risk is generally greater for these investments that are required to
pay interest only at maturity rather than at intervals during the life of the
investment.
<PAGE>
PORTFOLIO TURNOVER
Portfolio turnover rates are believed to be higher than the turnover experienced
by most fixed income funds, due to the Investment Adviser's active management of
duration. This could, in turn, lead to higher turnover costs. High Portfolio
turnover may involve greater brokerage commissions and transactions costs which
will be paid by the Portfolio. In addition, high turnover rates may result in
increased short-term capital gains.
<PAGE>
SUPPLEMENTAL INVESTMENT POLICIES
The Portfolio may invest more than 5% of its net assets in futures margins
and/or premiums on options only if those net assets are being used for bona fide
hedging purposes.
<PAGE>
FINANCIAL HIGHLIGHTS TABLE
The Financial Highlights Table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain
information reflects financial results for a single Portfolio share. The
"Total Return" indicates how much an investment in the Portfolio would have
earned or lost, assuming all dividends and distributions had been reinvested.
This information for the year ended December 31, 1999 has been audited by KPMG
LLP. You will find the auditor's report and the FFTW Funds, Inc., financial
statements in the annual report, which is available upon request. Financial
Highlights for the years prior to 1999 were audited by other auditors.
<PAGE>
FFTW FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
LIMITED DURATION PORTFOLIO
<TABLE>
<CAPTION>
FOR THE YEAR ENDED,
------------------------------------------------
FOR A SHARE OUTSTANDING DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
THROUGHOUT THE PERIOD: 1999 1998 1997 1996 1995
- - ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
- - -------------------------
Net asset value,
beginning of period $ 9.93 $ 9.93 $ 9.93 $ 10.00 $ 9.55
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
- - -------------------------
Investment income, net 0.55 * 0.55 0.62 0.55 0.60
Net realized and
unrealized gain (loss)
on investments
financial futures and
options contracts, and
foreign
currency-related
transactions (0.27) 0.11 0.08 (0.04) 0.45
-------- -------- -------- -------- --------
Total from investment
operations 0.28 0.66 0.70 0.51 1.05
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
- - -------------------------
From investment income,
net 0.55 0.55 0.62 0.55 0.60
In excess of investment
income, net - 0.00 ** - 0.00 ** -
From net realized and
unrealized gain on
investments financial
futures and options
contracts and foreign
currency-related
transactions - 0.11 0.08 0.03 -
-------- -------- -------- -------- --------
Total distributions 0.55 0.66 0.70 0.58 0.60
-------- -------- -------- -------- --------
Net asset value, end of
period $ 9.66 $ 9.93 $ 9.93 $ 9.93 $ 10.00
======== ======== ======== ======== ========
TOTAL RETURN 2.88% 6.79% 7.21% 5.29% 11.26%
- - -------------------------
RATIOS/SUPPLEMENTAL DATA
- - -------------------------
Net assets, end of period
(000's) $100,105 $ 89,521 $ 40,029 $ 42,100 $ 5,080
Ratio of operating
expenses to average net
assets, exclusive of
interest expense (a) 0.30% 0.30% 0.30% 0.31% 0.50%
Ratio of operating
expenses to average net
assets, inclusive of
interest expense (a) 0.30% 0.30% 0.60% 0.49% 1.41%
Ratio of investment
income, net to average
net assets (a) 5.60% 5.48% 6.10% 5.79% 6.09%
Decrease in above expense
ratios due to waiver of
investment advisory
fees and reimbursement
of other expenses 0.24% 0.22% 0.31% 0.15% 0.53%
Portfolio Turnover 823% 1,059% 1,292% 1,387% 1,075%
</TABLE>
- - --------------------------------------------------------------------------------
(a) Net of waivers and reimbursements.
* Calculation done based on average shares outstanding.
** Rounds to less than $0.01.
<PAGE>
SHAREHOLDER INQUIRIES
This Prospectus contains a concise statement of information investors should
know before they invest in the Portfolio. Please retain this Prospectus for
future reference. Additional information about the Portfolio's investments is
available in the Portfolio's annual and semi-annual reports to shareholders,
as well as the Statement of Additional Information (SAI) dated May 1, 2000.
The SAI provides more detailed information about the Portfolio, including its
operations and investment policies. A current SAI is on file with the
Securities and Exchange Commission and is incorporated by reference and is
legally considered a part of this Prospectus. In the Portfolio's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Portfolio's performance during its
last fiscal year.
The Portfolio's SAI, annual and semi-annual reports are available, without
charge, upon request by contacting Investors Capital, 600 Fifth Avenue, New
York, NY 10020, (800) 762-4848.
Information about the Portfolio (including the SAI) can be reviewed and copied
at the Commission's Public Reference Room in Washington D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 1-202-942-8090. Reports and other information about the
Portfolio are available on the Commission's Internet site at
http://www.sec.gov. Copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington D.C. 20549-0102 or by electronic request at the
following e-mail address: [email protected].
DISTRIBUTED BY:
FIRST FUND DISTRIBUTORS, INC.
Fund's Investment Company Act filing number: 811-5796
<PAGE>
FFTW FUNDS, INC.
================================================================================
PROSPECTUS
WORLDWIDE-HEDGED PORTFOLIO
================================================================================
DATED MAY 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE PORTFOLIO'S SHARES
AS AN INVESTMENT OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Risk/Return Summary 3
Investment Objectives, Principal Investment Strategies and Investments 3
Principal Investment Risks 4
Risk Return Bar Chart and Table 5
Fee Table 6
Expense Table Example 6
Fund Management 6
Shareholder Information 7
Investment Information 11
Portfolio Turnover 19
Supplemental Investment Policies 20
Financial Highlights Table 21
Shareholder Inquiries 22
</TABLE>
2
<PAGE>
RISK/RETURN SUMMARY
The following is a summary of certain key information about the Worldwide-Hedged
Portfolio (the "Portfolio"), including its investment objective, principal
investment strategies and principal investment risks. A more detailed
description of the permitted investment strategies, investments and their
associated risks will follow.
<TABLE>
<CAPTION>
Investment Objectives, Principal Investment Strategies
and Investments
==============================================================================================================================
WORLDWIDE-HEDGED PORTFOLIO
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of
capital.
- - ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES: The Portfolio invests primarily in high quality (rating of AA by S&P, Aa by Moody's or a
comparable rating, or higher from a nationally recognized statistical rating organization)
debt securities from worldwide bond markets, denominated in both U.S. dollars and foreign
currencies and actively utilizes currency hedging techniques. The performance objective of
the Portfolio is to outperform the Lehman Brothers Global Aggregate Index (Hedged).
- - ------------------------------------------------------------------------------------------------------------------------------
MINIMUM QUALITY RATING: S&P Moody's AVERAGE
S&P: MOODY'S: (SHORT TERM): (SHORT TERM): THOMPSON: PORTFOLIO QUALITY:
BBB- Baa3 A-2 P-2 B AA (AA)
- - ------------------------------------------------------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not differ from the
average duration of the Lehman Brothers Global Aggregate Index (Hedged) by more than one
year. As of December 31, 1999, the duration of the Lehman Brothers Global Aggregate Index
(Hedged) was 5.06 years.
- - ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in high quality debt
securities from worldwide bond markets, denominated in both U.S. dollars and foreign
currencies. The Portfolio will maintain investments in debt securities of issuers from at
least three different countries including the U.S. At least 35% of the Portfolio's total
assets will be invested in debt securities from jurisdictions outside the U.S. As a
fundamental policy, to the extent feasible, the Portfolio will actively utilize currency
hedging techniques to hedge at least 65% of its total assets. For temporary defensive
purposes, 100% of the Portfolio's total assets may be invested in U.S. Government
securities, cash or cash equivalent securities. These defensive strategies may prevent
the Portfolio from achieving its investment objective. The Portfolio is "non-diversified"
under the 1940 Act.
- - ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL - Asset-Backed Securities
INVESTMENTS: (See - Corporate Debt Instruments
Permitted Investment - Foreign Instruments
Strategies, - U.S. Government and Agency Securities
Investments and
Associated Risks for
a more detailed
description)
==============================================================================================================================
</TABLE>
3
<PAGE>
PRINCIPAL INVESTMENT RISKS
"Risk" is the chance that you may lose money on an investment or that you will
not earn as much as you expect. The greater the risk, the greater the
possibility of losing money.
The Portfolio is affected by changes in the economy, or in securities and other
markets.
The possibility also exists that investment decisions of portfolio managers will
not accomplish what they are designed to achieve. No assurance can be given that
the Portfolio's investment objective will be achieved.
The Portfolio may invest in securities issued by the U.S. Government, its
agencies or sponsored entities. Some of these securities are backed by the
full faith and credit of the United States and others which are subject to
varying degrees of risk.
Investments in the Portfolio are subject to certain of the following risks:
<TABLE>
<CAPTION>
<S> <C>
CORRELATION Derivatives are financial instruments whose value depends
RISK: upon, or is derived from, the value of something else, such
as one or more underlying securities, indexes or currencies.
The prices of a particular derivative instrument may not
move in the same way as the underlying security or, in the
case of a hedging transaction, of the securities which are
the subject of a hedge.
CREDIT The Portfolio may be exposed to the risk that a security's
RISK: issuer or a counterparty to a contract will default or not
be able to honor a financial obligation.
CURRENCY Fluctuations in exchange rates between the U.S. dollar and
RISK: foreign currencies may negatively affect an investment. When
synthetic and cross-hedges are used, the net exposure of the
Portfolio to any one currency may be different from that of
its total assets denominated in such currency.
FOREIGN Investing in foreign securities will expose the Portfolio
RISK: to risks such as political and economic instability,
currency devaluation and high inflation rates, which may
result in Portfolio losses and volatility.
FUTURES The use of futures exposes the Portfolio to the risk that
RISK: the Investment Adviser will not be able to anticipate
correctly movements in the direction of interest rates,
securities prices, and currency markets and the imperfect
correlation between the price of futures contracts and
movements in the prices of the securities.
HEDGING Hedging exposes the Portfolio to the risk that the hedge
RISK: will lose value while the hedged investment increases in
value.
INTEREST RATE Investing in fixed-rate debt securities will expose the
RISK: Portfolio to the risk that the value of the Portfolio's
investments will decline if interest rates rise.
LEVERAGE The use of derivatives exposes the Portfolio to the risk of
RISK: leverage which may result in greater fluctuations in the
Portfolio's net asset value than would have occurred had the
Portfolio invested in the underlying security.
LIQUIDITY Certain securities may be difficult or impossible to sell at
RISK: favorable prices within the desired time frame.
MARKET The market value of a security may increase or decrease over
RISK: time. Such fluctuations can cause a security to be worth
less than the price originally paid for it or less than it
was worth at an earlier time. Market risk may affect a
single issuer, entire industry or the market as a whole.
NON- A non-diversified Portfolio may invest more of its assets in
DIVERSIFICATION the securities of fewer companies than a diversified
RISK: Portfolio. This vulnerability to factors affecting a single
investment can result in greater Portfolio losses and
volatility.
PREPAYMENT A portfolio that invests in mortgage-backed and other asset
RISK: backed securities is exposed to the risk that such
securities may repay the principal either faster or slower
than expected.
</TABLE>
4
<PAGE>
RISK/RETURN BAR CHART AND TABLE
The following chart and table give some indication of the risks of investing
in the Portfolio. The chart and table illustrate the changes in the
Portfolio's yearly performance and show how the Portfolio's average annual
total returns for 1 year, 5 years and since inception compare with a selected
index. Past performance is not necessarily an indication of how the Portfolio
will perform in the future.
[CHART]
WORLDWIDE-HEDGED PORTFOLIO
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
12.89% 7.84% 11.00% 10.03% 12.60% 11.53% -0.19%
</TABLE>
During the seven-year period shown in the Worldwide-Hedged Portfolio's bar
chart, the highest quarterly return was 10.46% (quarter ending 9/30/94) and the
lowest quarterly return was -3.98% (quarter ending 3/31/94).
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(FOR THE PERIODS ENDING DECEMBER 31, 1999) (5/19/92)
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Worldwide-Hedged Portfolio* (0.19%) 8.88% 9.32%
- - -----------------------------------------------------------------------------------------------------------------------
JP Morgan Global Government Bond Index (Hedged)** 0.73% 9.77% 8.05%
- - -----------------------------------------------------------------------------------------------------------------------
Lehman Brothers Global Aggregate Index (Hedged) 0.79% N/A N/A
- - -----------------------------------------------------------------------------------------------------------------------
* Effective March 31, 2000, the Worldwide-Hedged Portfolio changed its
performance benchmark index to Lehman Brothers Global Aggregate Index
(Hedged) because the new index better reflects the relative weighting
of U.S. and Japanese securities, and government and non-government
securities, in the Portfolio. The Lehman Brothers Global Aggregate
Index commenced January 31, 1999.
** Performance for this benchmark is shown from 5/19/92 until 7/31/94 and
from 7/1/95 until 12/3/99. The IBC's Money Fund Report Averages-TM-.
All Taxable is used from 5/1/94 through 6/30/95. For the period between
8/1/94 and 6/30/95, the Worldwide-Hedged Portfolio was invested in cash
or short-term instruments due to its small size. Consequently, the
Portfolios performance is compared to this constructed benchmark.
</TABLE>
5
<PAGE>
FEE TABLE
This Table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) None
--------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)1
--------------------------------------------------------------------------------------------------
Management Fees 0.40%
--------------------------------------------------------------------------------------------------
Distribution Fees (12b-1) None
--------------------------------------------------------------------------------------------------
Other Expenses 0.19%
--------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.59%
--------------------------------------------------------------------------------------------------
</TABLE>
1. The Investment Adviser and Investors Capital (the "Administrator") have
voluntarily agreed to cap the Portfolio's Net Operating Expenses at 0.45%
(on an annualized basis) of the Portfolio's average daily net assets. All
operating expenses exceeding caps will be paid by the Investment Adviser or
Administrator, as applicable. The Investment Adviser and the Administrator
will not attempt to recover prior period waivers should expenses fall below
the cap. For the fiscal year ended 12/31/99, the Investment Adviser and
Administrator waived fees in the amount of 0.14%. Under an Administration
Agreement effective May 29, 1998 between the Portfolio and the
Administrator, the Administrator provides administrative services to the
Portfolio for an Administrative fee and an incentive fee. The incentive fee
is paid to the Administrator in the event the Portfolio operates below
its expense ratio. This fee is capped at 0.02% of the Portfolio's average
daily net assets. Such waivers can be terminated at any time.
EXPENSE TABLE EXAMPLE
The table is intended to help you compare the cost of investing in the Portfolio
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that the Portfolio's operating expenses remain the same. Although your actual
costs may be higher or loser, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
$60 $189 $330 $739
- - -----------------------------------------------------------------------------------------
</TABLE>
FUND MANAGEMENT
BOARD OF DIRECTORS
The Board of Directors of FFTW Funds, Inc. (the "Fund"), is responsible for the
overall management and supervision of the Portfolio which is a series of the
Fund. The Fund's Directors are Stephen P. Casper, John C Head III, Lawrence B.
Krause, Andrea Redmond, Saul H. Hymans and Onder John Olcay. Additional
information about the Directors and the Fund's executive officers may be found
in the Statement of Additional Information under the heading "Management of the
Fund."
INVESTMENT ADVISER
Subject to the direction and authority of the Board of Directors, Fischer
Francis Trees & Watts, Inc. ("FFTW" or the "Investment Adviser") serves as
Investment Adviser to the Portfolio. The Investment Adviser continuously
conducts investment research and is responsible for the purchase, sale or
exchange of the Portfolio's assets. Organized in 1972, the Investment Adviser
is registered with the Securities and Exchange Commission and is a New York
corporation, that, with its affiliated companies, currently manages
approximately $30 billion in assets for numerous fixed-income portfolios. The
Investment Adviser currently advises over 125 major institutional clients
including banks, central banks, pension funds and other institutional
clients. The average size of a client relationship with the Investment
Adviser is in excess of $200 million. The Investment Adviser also serves as
the sub-adviser to three portfolios of two other open-end management
investment companies. The Investment Adviser's offices are located at 200
Park Avenue, New
6
<PAGE>
York, New York 10166. The Investment Adviser is directly wholly owned by Charter
Atlantic Corporation, a New York corporation. The Portfolio paid the
Investment Adviser for its services in the twelve months ended December 31,
1999, at a rate of 0.26% of the Portfolio's average daily net assets.
INVESTMENT SUB-ADVISER
Fischer Francis Trees & Watts, a corporate partnership organized under the laws
of the United Kingdom and an affiliate of the Investment Adviser, is the foreign
Sub-Adviser to the Portfolio. Organized in 1989, the Sub-Adviser is a
U.S.-registered investment adviser and currently manages approximately $7.5
billion in multi-currency fixed-income portfolios for institutional clients. The
Investment Adviser pays the Sub-Adviser monthly from its advisory fee. The
Sub-Adviser's annual fee is equal to the advisory fee for the Portfolio. The
Sub-Adviser's offices are located at 3 Royal Court, The Royal Exchange, London,
EC 3V 3RA. The Investment Sub-Adviser is directly or indirectly wholly owned by
Charter Atlantic Corporation, a New York corporation.
PORTFOLIO MANAGERS
FFTW uses a team approach for making the strategic and sector allocations within
each of its model portfolios. For each Portfolio, a specific portfolio manager
is responsible for portfolio implementation and compliance with
Portfolio-specific and FFTW-wide investment strategy. The portfolio manager
determines the broad risk parameters under which a Portfolio operates, but
relies on specialist investment teams for the generation of ideas and specific
investments in a Portfolio. The following groups and teams assist in the
selection of specific investments, subject to each Portfolio's investment
policies and restrictions: the Duration, Country and Foreign Exchange Strategy
Group, consisting of the Foreign Exchange, U.S. Bloc, Europe and Japan teams,
and the Sector Allocation Strategy Group, consisting of the Global Credit,
Mortgages and Emerging Markets teams.
STEWART M. RUSSELL, MANAGING DIRECTOR. Mr. Russell is responsible for management
of the Portfolio and other portfolios of FFTW Funds, Inc. Mr. Russell joined
FFTW in 1992 from the short-term proprietary trading desk in the global markets
area of J.P. Morgan, where he was responsible for proprietary positioning of
U.S. and non-U.S. government obligations, corporate bonds, and asset-backed
securities. Prior to that, Mr. Russell managed J.P. Morgan's short-term interest
rate risk group, coordinating a $10 billion book of assets and liabilities. Mr.
Russell holds a B.A. in government from Cornell University and an M.B.A. in
finance from New York University.
ADNAN AKANT, MANAGING DIRECTOR. Mr. Akant joined FFTW in 1984, after six
years with the World Bank, where he served as a project financial analyst in
Europe and the Middle East area before joining the treasurer's staff as an
investment officer. As a member of the investment department of the World
Bank, Mr. Akant was responsible for investment and trading of each of the
major sectors of the bank's actively managed liquidity portfolio. He was also
a member of the investment strategy committee and shared responsibility for
formulating and implementing the bank's trading and investment strategy. Mr.
Akant was later promoted to senior investment officer, and was the division's
deputy in charge of the U.S. dollar portfolio. Mr. Akant holds a Ph.D. in
systems science, an MS in finance and international management, an Engineer's
degree, and M.S. and B.S. degrees in electrical engineering, all from the
Massachusetts Institute of Technology. Mr. Akant also taught graduate and
undergraduate level courses as a teaching assistant. Mr. Akant is a member of
the New York Academy of Sciences, IEEE, and of the Sigma XI, Tau Beta Pi, and
Eta Kappa Nu honor societies.
7
<PAGE>
SHAREHOLDER INFORMATION
PURCHASES
Portfolio shares may be purchased directly from the Portfolio, or obtained by
employing the services of an outside broker or agent. Such broker or agent may
charge a fee for its services. The minimum initial investment in the Portfolio,
if shares are purchased directly from the Fund, is $100,000; such minimum may be
waived at the discretion of FFTW or First Fund Distributors, Inc. ("First Fund"
or the Distributor). Subsequent investments or redemptions may be of any amount.
Initial investments, if obtained through a broker or agent may be for amounts
lower than $100,000. There are no loads or 12b-1 distribution fees imposed by
the Portfolio. Shares purchased will begin accruing dividends on the day Federal
funds are received.
Purchases of shares may be made on any "Business Day," meaning any Monday
through Friday, that the New York Stock Exchange is open. At the present time,
the New York Stock Exchange is closed on New Year's Day, Dr. Martin Luther
King's Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas.
WIRING INSTRUCTIONS
To: Investors Bank & Trust Company, Boston, Massachusetts
ABA Number: 011001438
Account Name: First Fund Distributors, Inc. - Fund Purchase Account
Account Number: 933333333
Reference: Worldwide-Hedged Portfolio
<TABLE>
<CAPTION>
TO PURCHASE SHARES
- - -------------------------------------------------------------------------------------------------------------------
WHEN NET ASSET WHEN & HOW SHARES PROCEDURE FOR SAME DAY RESULT OF LATE NOTIFICATION OR
VALUE (NAV) IS MAY BE PURCHASED PURCHASES DELAY IN RECEIPT OF FUNDS
DETERMINED
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
All Business - Any Business Day - Purchasers must call - The Portfolio must
Days Investors Capital at receive notice before 4
- Submitted orders must (800)762-4848, or (212) p.m. (wire may be
include a completed 335-5211 if within the received after 4 p.m. ET)
account application. City of New York, or for shares to be bought
Investors Bank at (800) at that day's price.
- Federal fund must be 247-0473 prior to 4:00
wired to First Fund's p.m. ET to inform the - Shares will be bought at
"Fund Purchase Account" Portfolio of the incoming the next business day's
at Investors Bank & wire transfer. price if wire is received
Trust Company after 4:00 p.m. ET and no
("Investors Bank"). - Purchasers must indicate notice is given.
which Portfolio is to be
purchased.
- If Federal funds are
received by the Portfolio
that day, the order will
be effective that day.
Price of shares is based
on the next calculation
of NAV after the order is
placed.
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
REDEMPTIONS
All Portfolio shares (fractional and full) will be redeemed upon shareholder
request. The redemption price will be the next net asset value per share,
determined after the Transfer Agent receives proper notice of
8
<PAGE>
redemption (see table below). Shares redeemed receive dividends declared up to,
and including the day preceding the day of the redemption payment.
Shares may be redeemed by employing the services of an outside broker or agent
or may be redeemed directly from the Portfolio. Such broker or agent may charge
a fee for its services. There are no loads or 12b-1 distribution fees imposed by
the Portfolio. No charge is imposed by the Portfolio to redeem shares; however,
a shareholder's bank may impose its own wire transfer fee for receipt of the
wire. The Portfolio may execute redemptions in any amount requested by the
shareholder up to the amount the shareholder has invested in the Portfolio.
A shareholder may change its authorized agent or the account designated to
receive redemption proceeds at any time by writing to the Transfer Agent with an
appropriate signature guarantee. Further documentation may be required when
deemed appropriate by the Transfer Agent.
A telephone redemption option is made available to shareholders on the
Portfolio's Account Application. The Portfolio or the Transfer Agent may employ
procedures designed to confirm that instructions communicated by telephone are
genuine. If the Portfolio does not employ such procedures, it may be liable for
losses due to unauthorized or fraudulent instructions. The Portfolio or the
Transfer Agent may require personal identification codes and will only wire
funds through pre-existing bank account instructions. No bank instruction
changes will be accepted via telephone.
In an attempt to reduce expenses, the Portfolio may redeem shares of any
shareholder whose Portfolio account has a net asset value lower than $100,000. A
shareholder's account may be involuntarily redeemed should the account value
fall below minimum investment requirements. An involuntary redemption will not
occur when drops in investment value are the sole result of adverse market
conditions. The Portfolio will give 60 days prior written notice to shareholders
whose shares are being redeemed to allow them to purchase sufficient additional
shares of the Portfolio to avoid such redemption. The Portfolio also may redeem
shares in a shareholder's account as reimbursement for loss due to the failure
of a check or wire to clear in payment of shares purchased.
<TABLE>
<CAPTION>
<S><C>
TO REDEEM SHARES
- - ---------------------------------------------------------------------------------------------------------
1. SHAREHOLDERS MUST PROVIDE THE FOLLOWING INFORMATION:
a. The dollar or share amount to be redeemed;
b. The account to which the redemption proceeds should be wired (this account
will have been previously designated by the shareholder on its Account
Application Form);
c. The name of the shareholder; and
d. The shareholder's account number
2. SHAREHOLDERS SHOULD CALL THE TRANSFER AGENT AT (800) 247-0473 OR INVESTORS
CAPITAL SERVICES AT (800) 762-4848 TO REQUEST A REDEMPTION.
3. IN THE CASE OF FOREIGN EXCHANGES, THE PORTFOLIO'S NAV MAY CHANGE WHEN
SHAREHOLDERS CANNOT BUY OR SELL SHARES.
- - ---------------------------------------------------------------------------------------------------------
WHEN REDEMPTION EFFECTIVE RESULT OF LATE NOTIFICATION OF REDEMPTION
- - ---------------------------------------------------------------------------------------------------------
If notice is received by the Transfer Agent If notice is received by the Transfer Agent
by 4:00 p.m. ET on any Business Day, the on a non-business day or after 4:00 p.m. ET,
redemption will be effective and payment will the redemption notice will be deemed received
be made within seven calendar days, but as of the next Business Day.
generally two business days following receipt
of such notice. Price of shares is based on
the next calculation of the NAV after the
order is placed.
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
PRICING OF PORTFOLIO SHARES
Your price for Portfolio shares is the Portfolio's net asset value per share.
Portfolio net asset value is calculated by: (1) adding the market value of all
the Portfolio's assets, (2) subtracting all of the Portfolio's
9
<PAGE>
liabilities, and then (3) dividing by the number of shares outstanding and
adjusting to the nearest cent. The net asset value of the Portfolio is
calculated by the Portfolio's Accounting Agent as of 4:00 p.m. ET on each
Business Day.
All portfolio investments are valued daily at their market price, which
results in unrealized gains or losses. Readily marketable fixed-income
securities are valued on the basis of prices provided by a pricing service
when such prices are believed by the Investment Adviser to reflect the fair
value of such securities. Securities traded on an exchange are valued at
their last sales price on that exchange. Securities and other financial
instruments for which over-the-counter market quotations are available are
valued at the latest bid price (asked price for short sales). Time deposits
and repurchase agreements are generally valued at their cost plus accrued
interest. Securities for which market quotations are not readily available
will be valued in good faith by methods approved by the Board of Directors.
Securities with maturitites less than 60 days are valued at amortized cost,
which approximates market value, unless this method does not represent fair
value.
DIVIDENDS
If desired, shareholders must request to receive dividends in cash (payable
on the first business day of the following month) on the Account Application
Form. Absent such notice, all dividends will be automatically reinvested in
additional shares on the last Business Day of each month at the share's net
asset value. In the event that the Portfolio realizes net short-term or
long-term capital gains (i.e., with respect to assets held more than one
year), the Portfolio will distribute such gains by automatically reinvesting
(unless a shareholder has elected to receive cash) them in additional
Portfolio shares.
Net investment income (including accrued but unpaid interest, amortization of
original issue and market discount or premium) of the Portfolio will be declared
as a dividend payable daily to shareholders of record as of the close of each
Business Day.
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other shareholder voting matters. Matters to be acted upon affecting the
Portfolio (such as approval of the investment advisory agreement with the
Investment Adviser or the submission of changes of fundamental Portfolio
investment policy) require the affirmative vote of the Portfolio shareholders.
The election of the Fund's Board of Directors and the approval of the Fund's
independent auditors are voted upon by shareholders on a Fund-wide basis. The
Fund is not required to hold annual shareholder meetings. Shareholder approval
will be sought only for certain changes in the Fund's or the Portfolio's
operation and for the election of Directors under certain circumstances.
Directors may be removed by shareholders at a special meeting. The Directors
shall call a special meeting of the Portfolio upon written request of
shareholders owning at least 10% of the Portfolio's outstanding shares.
TAX CONSIDERATIONS
The following discussion is for general information only. An investor should
consult with his or her own tax adviser as to the tax consequences of an
investment in the Portfolio, including the status of distributions from the
Portfolio under applicable state or local law. For additional information
regarding tax issues pertaining to the Portfolio, see "Supplemental Tax
Considerations" in the Statement of Additional Information.
FEDERAL INCOME TAXES
The Portfolio will distribute all of its taxable income by automatically
reinvesting such income in additional Portfolio shares and distributing those
shares to its shareholders, unless a shareholder elects on the Account
Application Form to receive cash payments for such distributions. Shareholders
receiving distributions from the Portfolio in the form of additional shares will
be treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such a distribution.
10
<PAGE>
Dividends the Portfolio pays from its investment company taxable income
(including interest and net short-term capital gains) will be taxable to U.S.
shareholders as ordinary income, whether received in cash or in additional Fund
shares. Designated distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses) are generally
taxable to shareholders at the applicable long-term capital gains rates,
regardless of how long they have held their Portfolio shares. If a portion of
the Portfolio's income consists of dividends paid by U.S. corporations, a
portion of the dividends paid by the Portfolio may be eligible for the corporate
dividends-received deduction.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by the Portfolio in October, November or December with a
record date in any such month and paid by the Portfolio during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. The Portfolio will inform
shareholders of the amount and tax status of all amounts treated as distributed
to them not later than 60 days after the close of each calendar year.
If a shareholder holds shares through a tax-deferred account, such as a
retirement plan, income and gains will not be taxable each year. Instead, the
taxable portion of amounts held in a tax-deferred account generally will be
subject to tax only when a distribution is made from that account.
A shareholder who sells or redeems Portfolio shares will generally realize a
capital gain or loss, which will be long-term or short-term, generally depending
upon the shareholder's holding of the shares. An exchange of shares may be
treated as a sale.
As with all mutual funds, the Portfolio may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who:
1. fail to provide the Portfolio with a correct taxpayer identification
number, or
2. fail to make required certifications, or
3. have been notified by the IRS that they are subject to backup withholding.
Backup withholding is not an additional tax; rather, it is a way in which the
IRS ensures it will collect taxes otherwise due. Any amount withheld may be
credited against U.S. federal income tax liability.
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the Portfolio and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Portfolio or its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors in the
Portfolio should consult their tax advisers with specific reference to their own
tax situation.
STATE AND LOCAL TAXES
The Portfolio may be subject to state, local or foreign taxation in any
jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes. Portfolio
distributions derived from interest on obligations of the U.S. Government and
certain of its agencies, authorities and instrumentalities may be exempt from
state and local taxes in certain states. Shareholders should consult their own
tax advisers regarding possible state and local income tax exclusions for
dividend portions paid by the Portfolio, which are attributable to interest from
obligations of the U.S. Government, its agencies, authorities and
instrumentalities.
DISTRIBUTION OF FUND SHARES
Shares of the Portfolio are distributed by First Fund, pursuant to a
Distribution Agreement dated as of January 1, 2000 by and among the Fund,
Investors Bank & Trust Company and First Fund. No fees are payable by the
Fund pursuant to the Distribution Agreement. Investors Bank & Trust Company
pays the distribution fee while FFTW pays all other fees and expenses related
to distribution.
INVESTMENT INFORMATION
PERMITTED INVESTMENT STRATEGIES, INVESTMENTS AND ASSOCIATED RISKS
11
<PAGE>
Principal Investments
- - - Asset-Backed Securities
- - - Corporate Debt Instruments
- - - Duration Management
- - - Foreign Instruments
- - - Hedging
- - - U.S. Government and Agency Securities
Other Investments and Investment Strategies
- - - Bank Obligations
- - - Brady Bonds
- - - Dollar Roll Transactions
- - - Illiquid Securities
- - - Indexed Notes, Currency Exchange-Related Securities and Similar Securities
- - - Inflation-Indexed Securities
- - - Investment Companies
- - - Mortgage-Backed Securities
- - - Multi-National Currency Unit Securities or More Than One Currency
Denomination
- - - Repurchase and Reverse Repurchase Agreements
- - - Short Sales Transactions
- - - Stripped Instruments
- - - TBA Transactions
- - - Total Return Swaps
- - - When Issued and Forward Commitment Securities
- - - Zero Coupon Securities
ASSET-BACKED SECURITIES
Asset-backed securities are secured by or backed by assets other than
mortgage-related assets, such as automobile and credit card receivables. These
securities are sponsored by such institutions as finance companies, finance
subsidiaries of industrial companies and investment banks. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities; however, the underlying assets are not first lien mortgage loans or
interests, but include assets such as:
a. motor vehicle installment sale contracts,
b. other installment sale contracts,
c. leases of various types of real and personal property, and
d. receivables from revolving credit (credit card) agreements.
RISKS: The principal amount of asset-backed securities is generally
subject to partial or total prepayment risk. If an asset-backed
security is purchased at a premium or discount to par, a prepayment
rate that is faster than expected will reduce or increase,
respectively, the yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect on yield to
maturity. These securities may not have any security interest in the
underlying assets, and recoveries on the repossessed collateral may
not, in some cases, be available to support payments on these
securities.
BANK OBLIGATIONS
Bank obligations are bank-issued securities. These instruments include, but are
not limited to:
a. Time Deposits,
b. Certificates of Deposit,
c. Bankers' Acceptances,
d. Bank Notes,
e. Deposit Notes,
f. Eurodollar Time deposits,
g. Eurodollar Certificates of
Deposit,
h. Variable Rate Notes,
i. Loan Participations,
j. Variable Amount Master Demand Notes,
k. Yankee CDs, and
l. Custodial Receipts
12
<PAGE>
RISKS: Investing in bank obligations exposes the Portfolio to risks
associated with the banking industry such as interest rate and credit
risks.
BRADY BONDS
Brady Bonds are debt securities, issued or guaranteed by foreign governments in
exchange for existing external commercial bank indebtedness. To date, over $109
billion (face amount) of Brady Bonds have been issued by the governments of
seventeen countries, the largest proportion having been issued by Argentina,
Brazil, Mexico and Venezuela. Brady Bonds are either collateralized or
uncollateralized, issued in various currencies (primarily the U.S. dollar), and
are actively traded in the over-the-counter secondary market.
The Portfolio may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
RISKS: Brady Bonds are generally issued by countries with developing
capital markets or unstable governments and as such, are considered to
be among the more risky international investments.
CORPORATE DEBT INSTRUMENTS
Corporate bonds are debt instruments issued by private corporations. As
creditors, bondholders have a prior legal claim over common and preferred
stockholders of the corporation as to both income and assets for the
principal and interest due to the bondholder. The Portfolio purchases
corporate bonds subject to quality restraints. Commercial paper, notes and
other obligations of U.S. and foreign corporate issuers (including
medium-term and variable rate notes) must meet the Portfolio's credit quality
standard . The Portfolio may retain a downgraded corporate debt security if
the Investment Adviser determines retention of such security to be in the
Portfolio's best interests.
RISKS: Investing in corporate debt securities subjects the Portfolio
to interest rate changes and credit risks.
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions consist of the sale of mortgage-backed securities, with
a commitment to purchase similar, but not identical securities at a future date,
and at the same price. The Portfolio will maintain a segregated custodial
account for dollar roll transactions. The segregated accounts may contain cash,
U.S. Government Securities or other liquid, unencumbered securities having an
aggregate value at least equal to the amount of such commitments to repurchase
the securities under the dollar roll transaction (including accrued interest).
RISKS: Should the broker-dealer to whom the Portfolio sells an
underlying security of a dollar roll transaction become insolvent, the
Portfolio's right to purchase or repurchase the security may be
restricted, or the price of the security may change adversely over the
term of the dollar roll transaction.
DURATION MANAGEMENT
Duration measures a bond's price volatility, incorporating the following
factors:
a. the bond's yield,
b. coupon interest payments,
c. final maturity,
d. call features, and
e. prepayment assumptions.
Duration measures the expected life of a debt security on a present value basis.
It incorporates the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled (or in the case
of a callable bond, expected to be received) and weighs them by the present
values of the cash to be received at each future point in time. For any debt
security with interest payments occurring
13
<PAGE>
prior to the payment of principal, duration is always less than maturity. In
general, for the same maturity, the lower the stated or coupon rate of interest
of a debt security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a debt security, the shorter the
duration of the security.
Futures, options and options on futures have durations closely related to the
duration of the securities that are underlying them. Holding long futures or
call options will lengthen the Portfolio's duration by approximately the same
amount that holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions and have the
effect of reducing duration by approximately the same amount that selling an
equivalent amount of the underlying securities would. The market price of a bond
with a duration of two years would be expected to decline 2% if interest rates
rose 1%. If a bond has an effective duration of three years, a 1% increase in
general interest rates would be expected to cause the bond's value to decline by
about 3%.
RISKS: Changes in weighted average duration of the Portfolio's holdings are not
likely to be so large as to cause them to fall outside the ranges specified
above. There is no assurance that deliberate changes in the Portfolio's weighted
average duration will enhance its return relative to more static duration
policies or Portfolio structures. In addition, it may detract from its relative
return.
FOREIGN INSTRUMENTS
a. FOREIGN SECURITIES
Foreign securities are securities denominated in currencies other than the U.S.
dollar and may be denominated in any single currency or multi-currency units.
The Investment Adviser and the Sub-Adviser will adjust exposure of the Portfolio
to different currencies based on their perception of the most favorable markets
and issuers. In allocating assets among multiple markets, the Investment Adviser
and the Sub-Adviser will assess the relative yield and anticipated direction of
interest rates in particular markets, general market and economic conditions and
the relationship of currencies of various countries to each other. In their
evaluations, the Investment Adviser and the Sub-Adviser will use internal
financial, economic and credit analysis resources as well as information
obtained from external sources.
The Portfolio will invest primarily in securities denominated in the currencies
of the United States, Japan, Canada, Western European nations, New Zealand and
Australia, as well as securities denominated in the Euro and the European
Currency Unit. Further, it is anticipated that such securities will be issued
primarily by governmental and private entities located in such countries and by
supranational entities. The Portfolio will only invest in countries considered
to have stable governments, based on the Investment Adviser's analysis of
social, political and economic factors.
b. FOREIGN GOVERNMENT, INTERNATIONAL AND SUPRANATIONAL AGENCY SECURITIES
These securities include debt obligations issued or guaranteed by a foreign
government or its subdivisions, agencies and instrumentalities, international
agencies and supranational entities.
RISKS: Generally, foreign financial markets have substantially less
volume than the U.S. market. Securities of many foreign companies are
less liquid, and their prices are more volatile than securities of
comparable domestic companies. The Portfolio may invest portions of its
assets in securities denominated in foreign currencies. These
investments carry risks of fluctuations of exchange rates relative to
the U.S. dollar. Securities issued by foreign entities (governments,
corporations, etc.) may involve risks not associated with U.S.
investments, including expropriation of assets, taxation, political or
social instability and low financial reporting standards--all of which
may cause declines in investment returns.
c. EMERGING MARKETS SECURITIES
Emerging markets securities are foreign securities issued from countries
which are considered to be "emerging" or "developing" by the Morgan Stanley
Capital Index (MSCI) or by the World Bank. Such emerging markets include all
markets other than Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom
and the United States.
14
<PAGE>
RISKS: The risks of investing in foreign securities may be intensified
when the issuers are domiciled or doing substantial business in
emerging market countries or countries with developing capital markets.
Security prices in emerging markets can be significantly more volatile
than those in more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and
economies. Emerging market countries may have:
a. Relatively unstable governments;
b. present the risk of sudden adverse government action;
c. nationalization of businesses;
d. restrictions on foreign ownership;
e. prohibitions of repatriation of assets; or
f. less protection of property rights than more
developed countries
The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in
local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may
trade a small number of securities and may be unable to respond
effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times.
Transaction settlement procedures may be less reliable in emerging
markets than in developed markets. Securities of issuers located in
countries with emerging markets may have limited marketability and may
be subject to more abrupt or erratic price movements.
HEDGING
Hedging techniques are used to offset certain investment risks. Such risks
include: changes in interest rates, changes in foreign currency exchange rates
and changes in securities and commodity prices. Hedging techniques are commonly
used to minimize a given instrument's risks of future gain or loss. Hedging
techniques include:
a. engaging in swaps;
b. purchasing and selling caps, floors and collars;
c. purchasing or selling forward exchange contracts;
d. purchasing and selling futures contracts; and
e. purchasing and selling options.
All hedging instruments described below constitute commitments by the Portfolio
and therefore require the Portfolio to segregate cash (in any applicable
currency), U.S. Government securities or other liquid and unencumbered
securities (in any applicable currency) equal to the amount of the Portfolio's
obligations in a separate custody account.
When the Portfolio purchases a futures or forward currency contract for
non-hedging purposes, the sum of the segregated assets plus the amount of
initial and variation margin held in the broker's account, if applicable, must
equal the market value of the futures or forward currency contract.
When the Portfolio sells a futures or forward currency contract for non-hedging
purposes, the Portfolio will have the contractual right to acquire:
1. the securities,
2. the foreign currency subject to the futures, or
3. the forward currency contract
The Portfolio will segregate assets, in an amount at least equal to the
market value of the securities or foreign currency underlying the futures or
forward currency contract.
Should the market value of the contract move adversely to the Portfolio, or if
the value of the securities in the segregated account declines, the Portfolio
will be required to deposit additional cash or securities in the segregated
account at a time when it may be disadvantageous to do so.
The Portfolio will not enter into any swaps, caps or floors unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either A or A-1 or better by S&P or A or P-1 or better by Moody's. If
unrated, it must be determined to be of comparable quality by the Investment
Adviser.
15
<PAGE>
a. SWAPS
Swaps are commonly used for hedging purposes. Hedging involving mortgage and
interest rate swaps may enhance total return. Interest rate swaps involve the
Portfolio's exchange with another party of their respective commitments to pay
or receive interest, such as an exchange of fixed rate payments for floating
rate payments. Mortgage swaps are similar to interest rate swaps, both represent
commitments to pay and receive funds. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
b. CAPS, FLOORS AND COLLARS
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar incorporates a cap and
a floor in one transaction as described above.
c. FORWARD FOREIGN EXCHANGE CONTRACTS
A forward foreign exchange contract is the purchase or sale of a foreign
currency, on a specified date, at an exchange rate established before the
currency's payment and delivery to hedge the currency exchange risk associated
with its assets or obligations denominated in foreign currencies. Synthetic
hedging is a technique utilizing forward foreign exchange contracts that is
frequently employed by the Portfolio. It entails entering into a forward
contract to sell a currency, the changes in value of which are generally
considered to be linked to a currency or currencies in which some or all of the
Portfolio's securities are or are expected to be denominated, and buying U.S.
dollars. There is a risk that the perceived linkage between various currencies
may not be present during the particular time that the Portfolio is engaging in
synthetic hedging. The Portfolio may also cross-hedge currencies by entering
into forward contracts to sell one or more currencies that are expected to
decline in value relative to other currencies to which the Portfolio has or
expects to have exposure.
d. FUTURES CONTRACTS
A futures contract is an agreement to buy or sell a specific amount of a
financial instrument at a particular price on a specified date. The futures
contract obligates the buyer to purchase the underlying commodity and the seller
to sell it. Losses from investing in futures transactions that are unhedged or
uncovered are potentially unlimited. Substantially all futures contracts are
closed out before settlement date or called for cash settlement. A futures
contract is closed out by buying or selling an identical offsetting futures
contract that cancels the original contract to make or take delivery. At times,
the ordinary spreads between values in the cash and futures markets, due to
differences in the character of these markets, are subject to distortions. The
possibility of such distortions means that a correct forecast of general market,
foreign exchange rate or interest rate trends may not produce the Portfolio's
intended results.
e. OPTIONS CONTRACTS
An option is a contractual right, but not an obligation, to buy (call) or sell
(put) property that is guaranteed in exchange for an agreed upon sum. If the
right is not exercised within a specified period of time, the option expires and
the option buyer forfeits the amount paid. An option may be a contract that
bases its value on the performance of an underlying bond. When the Portfolio
writes a call option, it gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open. A put option gives the purchaser, in return for
a premium, the right, for a specified period or time, to sell the securities or
currency subject to the option to the writer of the put at the specified
exercise price. The writer of the put option, in return for the premium, has the
obligation, upon exercise of the option, to acquire the securities or currency
underlying the option at the exercise price. The Portfolio might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
RISKS: Hedging involves risks of imperfect correlation in price movements of the
hedge and movements in the price of the hedged security. If interest or currency
exchange rates do not move in the direction of the hedge, the Portfolio will be
in a worse position than if hedging had not been employed. As a result, it will
lose all or part of the benefit of the favorable rate movement due to the cost
of the hedge or offsetting positions. Hedging transactions not entered into on
an U.S. or foreign exchange may subject the Portfolio to
16
<PAGE>
exposure to the credit risk of its counterparty. Futures and options
transactions entail special risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related Portfolio position could create the possibility that losses will be
greater than gains in the value of the Portfolio's position. Other risks include
the risk that the Portfolio could not close out a futures or options position
when it would be most advantageous to do so.
ILLIQUID SECURITIES
Illiquid securities cannot be sold or disposed of in the ordinary course of
business within seven days for approximately the value at which the Portfolio
has valued the securities. These include:
1. securities with legal or contractual restrictions on resale,
2. time deposits, repurchase agreements and dollar roll transactions having
maturities longer than seven days, and
3. securities not having readily available market quotations.
Although the Portfolio is allowed to invest up to 15% of the value of its net
assets in illiquid assets, it is not expected that the Portfolio will invest a
significant portion of its assets in illiquid securities. The Investment Adviser
monitors the liquidity of such restricted securities under the supervision of
the Board of Directors.
The Portfolio may purchase securities not registered under the Securities Act of
1933 as amended, (the "1933 Act"), but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act. The Portfolio
also may invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the 1933 Act
(Section 4(2) paper). Section 4(2) paper is restricted as to disposition under
the federal securities laws, and generally is sold to institutional investors.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
is normally resold to other institutional investors through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not determined
to be liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The Investment Adviser will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors.
RISKS: Investing in illiquid securities presents the potential risks of
tying up the Portfolio's assets at a time when liquidating assets may
be necessary to meet debts and obligations.
INDEXED NOTES, CURRENCY EXCHANGE-RELATED SECURITIES AND SIMILAR SECURITIES
These securities are notes; the principal amount of which and/or the rate of
interest payable are determined by reference to an index. This index may be
determined by the rate of exchange between the specified currency for the note
and one or more other currencies or composite currencies.
RISKS: Foreign currency markets can be highly volatile and are subject
to sharp price fluctuations. A high degree of leverage is typical for
foreign currency instruments in which the Portfolio may invest.
INFLATION-INDEXED SECURITIES
Inflation-indexed securities are linked to the inflation rate from worldwide
bond markets such as the U.S. Treasury Department's "inflation-protection"
issues. The initial issues are ten-year notes, which are issued quarterly. Other
maturities will be sold at a later date. The principal is adjusted for inflation
(payable at maturity) and the semi-annual interest payments equal a fixed
percentage of the inflation adjusted principal amount. The inflation adjustments
are based upon the Consumer Price Index for Urban Consumers. These securities
may be eligible for coupon stripping under the U.S. Treasury program. In
addition to the U.S. Treasury's issues, inflation-indexed securities include
inflation-indexed securities from other countries such as Australia, Canada, New
Zealand, Sweden and the United Kingdom.
RISKS: If the periodic adjustment rate measuring inflation falls, the
principal value of inflation-indexed bonds will be adjusted downward,
and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment
of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed
bonds, even during a period of deflation. However, the current market
value of the
17
<PAGE>
bonds is not guaranteed, and will fluctuate. The Portfolio also may
invest in other inflation related bonds that may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the
adjusted principal value of the bond repaid at maturity may be less
than the original principal.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is limited trading history for these securities,
and there can be no assurance that a liquid market in these instruments
will develop, although one is expected to continue to evolve. Lack of a
liquid market may impose the risk of higher transaction costs and the
possibility that the Portfolio may be forced to liquidate positions
when it would not be advantageous to do so. Finally, there can be no
assurance that the Consumer Price Index for Urban Consumers will
accurately measure the real rate of inflation in the price of goods and
services.
INVESTMENT COMPANIES
An investment company is an investment vehicle, which, for a management fee,
invests the pooled funds of investors in securities appropriate for its
investment objectives. Two basic types of investment companies exist:
1. Open end funds: these funds have a floating number of outstanding shares
and will sell or redeem shares at their current net asset value,
2. Closed end funds: these funds have a fixed number of outstanding shares
that are traded on an exchange.
The Portfolio will not invest in any funds classified as "load funds."
The acquiring company may not purchase or otherwise acquire securities in the
acquired company (if no-load) if, immediately after the acquisition the
acquiring company and any company controlled by it would own, in the aggregate,
more than 3% of the total outstanding voting stock of the acquired company or
would not otherwise comply with any requirements under the Investment Company
Act of 1940.
The Portfolio may invest in another Portfolio within the FFTW Funds, Inc.
family. This is commonly referred to as cross-portfolio investing. Should such
cross-portfolio investing occur, investors will not be double-charged advisory
fees. The Portfolio in which it is directly invested will only charge investors
an advisory fee.
RISKS: Generally, risks posed by a particular fund will mirror those
posed by the underlying securities. A money market fund has the highest
safety of principal, whereas bond funds are vulnerable to interest rate
movements.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities representing ownership interests in,
or debt obligations secured entirely or primarily by, "pools" of residential or
commercial mortgage loans or other mortgage-backed securities. Mortgage-backed
securities may take a variety of forms, the most common being:
1. Mortgage-pass through securities issued by
a. the Government National Mortgage Association (Ginnie Mae),
b. the Federal National Mortgage Association (Fannie Mae),
c. the Federal Home Loan Mortgage Corporation (Freddie Mac),
d. commercial banks, savings and loan associations, mortgage banks or by
issuers that are affiliates of or sponsored by such entities,
2. Collateralized mortgage obligations (CMOs) which are debt obligations
collateralized by such assets, and
3. Commercial mortgage-backed securities.
The Investment Adviser expects that new types of mortgage-backed securities may
be created offering asset pass-through and asset-collateralized investments in
addition to those described above by governmental, government-related and
private entities. As new types of mortgage-related securities are developed and
offered to investors, the Investment Adviser will consider whether it would be
appropriate for such Portfolio to make investments in them.
CMOs are derivatives collateralized by mortgage pass-through securities. Cash
flows from mortgage pass-through securities are allocated to various tranches in
a predetermined, specified order. Each tranche has a
18
<PAGE>
stated maturity - the latest date by which the tranche can be completely repaid,
assuming no prepayments - and has an average life - the average of the time to
receipt of a principal payment weighted by the size of the principal payment.
The average life is typically used as a proxy for maturity because the debt is
amortized, rather than being paid off entirely at maturity.
RISKS: The Portfolio may invest in mortgage-backed and other
asset-backed securities carrying the risk of a faster or slower than
expected prepayment of principal which may affect the duration and
return of the security. Portfolio returns will be influenced by changes
in interest rates. Changes in market yields affect the Portfolio's
asset value since Portfolio debt will generally increase in value when
interest rates fall and decrease when interest rates rise. Compared
to debt that cannot be prepaid, mortgage-backed investments are less
likely to increase in value during periods of declining interest
rates and have a higher risk of decline in value during periods of
rising interest rates. Thus, interest rates have an inverse
relationship with corresponding market values. Prices of shorter-term
securities generally fluctuate less in response to interest rate
changes than do longer-term securities.
MULTI-NATIONAL CURRENCY UNIT SECURITIES OR MORE THAN ONE CURRENCY DENOMINATION
Multi-national currency unit securities are tied to currencies of more than one
nation. This includes the European Currency Unit--a "basket" consisting of
specified currencies of the member states of the European Community (a Western
European economic cooperative organization). These securities include securities
denominated in the currency of one nation, although it is issued by a
governmental entity, corporation or financial institution of another nation.
RISKS: Investments involving multi-national currency units are subject
to changes in currency exchange rates which may cause the value of such
invested securities to decrease relative to the U.S.
dollar.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Under a repurchase agreement, a bank or securities firm (that is a dealer in
U.S. Government Securities reporting to the Federal Reserve Bank of New York) or
the Fund's Custodian agrees to sell U.S. Government Securities to the Portfolio
and repurchase such securities from the Portfolio for an agreed price at a later
date. Under a reverse repurchase agreement, a primary or reporting dealer in
U.S. Government Securities purchases U.S. Government Securities from the
Portfolio and the Portfolio agrees to repurchase the securities for an agreed
price at a later date.
The Portfolio will maintain a segregated custodial account for its reverse
repurchase agreements. Until repayment is made, the segregated accounts may
contain cash, U.S. Government Securities or other liquid, unencumbered
securities having an aggregate value at least equal to the amount of such
commitments to repurchase (including accrued interest). Repurchase and reverse
repurchase agreements will generally be restricted to those maturing within
seven days.
RISKS: If the other party to a repurchase and/or reverse repurchase
agreement becomes subject to a bankruptcy or other insolvency
proceeding, or fails to satisfy its obligations thereunder, delays may
result in recovering cash or the securities sold, or losses may occur
as to all or part of the income, proceeds or rights in the security.
SHORT SALES
Short sales are transactions in which the Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. Short
selling provides the Investment Adviser with flexibility to reduce certain risks
of the Portfolio's holdings and increase the Portfolio's total return. To the
extent that the Portfolio has sold securities short, it will maintain a daily
segregated account, containing cash, U.S. Government securities or other liquid
and unencumbered securities, at such a level that (a) the amount deposited in
the account plus the amount deposited with the broker as collateral will equal
the current value of the security sold short and (b) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short.
RISKS: A short sale is generally used to take advantage of an
anticipated decline in price or to protect a profit. The Portfolio will
incur loss as a result of a short sale if the price of the security
increases between the date of the short sale and the date on which
Portfolio replaces the borrowed security. The amount of any loss will
be increased by the amount of any premium or amounts in lieu
19
<PAGE>
of interest the Portfolio may be required to pay in connection with a
short sale. Without the purchase of an option, the potential loss from
a short sale is unlimited.
STRIPPED INSTRUMENTS
Stripped instruments are bonds, reduced to its two components: its rights to
receive periodic interest payments (IOs) and rights to receive principal
repayments (POs). Each component is then sold separately.
Such instruments include:
a. Municipal Bond Strips
b. Treasury Strips
c. Stripped Mortgage-Backed Securities
RISKS: POs do not pay interest. Its return is solely based on payment
of principal at maturity. Both POs and IOs tend to be subject to
greater interim market value fluctuations in response to changes in
interest rates. Stripped Mortgage-Backed Securities IOs run the risk of
unanticipated prepayment, which will decrease the instrument's overall
return.
TBA (TO BE ANNOUNCED) TRANSACTIONS
In a TBA transaction, the type of mortgage-backed securities to be delivered is
specified at the time of trade, but the actual pool numbers of the securities to
be delivered are not known at the time of the trade. For example, in a TBA
transaction, an investor could purchase $1 million 30 year mortgage-backed
securities issued by the Federal National Mortgage Association and receive
up to three pools on the settlement date. The pool numbers to be delivered at
settlement will be announced shortly before settlement takes place. Agency
pass-through mortgage-backed securities are usually issued on a TBA basis. The
Portfolio will maintain a segregated custodial account containing cash, U.S.
Government securities or other liquid and unencumbered securities having a value
at least equal to the aggregate amount of the Portfolio's TBA transactions.
RISKS: The value of the security on the date of delivery may be less
than its purchase price, presenting a possible loss of asset value.
TOTAL RETURN SWAPS
A total return swap is an exchange of one security for another. Unlike a hedge
swap, a total return swap is solely entered into as a derivative investment to
enhance total return.
RISKS: A total return swap may result in the Portfolio obtaining an
instrument, which for some reason, does not perform as well as the
original swap instrument. Additionally, potential risks of default also
exist on the part of the counterparty.
U.S. GOVERNMENT AND AGENCY SECURITIES AND GOVERNMENT-SPONSORED
ENTERPRISES/FEDERAL AGENCIES
U.S. Government and agency securities are issued by or guaranteed as to
principal and interest by the U.S. Government, its agencies or instrumentalities
and supported by the full faith and credit of the United States. The Portfolio
also may invest in other securities which may be issued by a U.S.
Government-sponsored enterprise or federal agency, and supported either by its
ability to borrow from the U.S. Treasury or by its own credit standing. Such
securities do not constitute direct obligations of the United States but are
issued, in general, under the authority of an Act of Congress. The universe of
eligible securities in these categories include those sponsored by:
a. U.S. Treasury Department,
b. Farmer's Home Administration,
c. Federal Home Loan Mortgage Corporation,
d. Federal National Mortgage Association,
e. Student Loan Marketing Association, and
f. Government National Mortgage Association.
RISKS: Investing in securities backed by the full faith and credit of
the U.S. Government are guaranteed only as to interest rate and face
value at maturity, not its current market price.
20
<PAGE>
WHEN ISSUED AND FORWARD COMMITMENT SECURITIES
The purchase of a when issued or forward commitment security will be recorded on
the date the Portfolio enters into the commitment. The value of the security
will be reflected in the calculation of the Portfolio's net asset value. The
value of the security on delivery date may be more or less than its purchase
price. Generally, no interest accrues to the Portfolio until settlement. The
Portfolio will maintain a segregated custodial account containing cash, U.S.
Government securities or other liquid and unencumbered securities having a
value at least equal to the aggregate amount of the Portfolio's when issued and
forward commitments transactions.
RISKS: The value of the security on the date of delivery may be less
than its purchase price, presenting a possible loss of asset value.
ZERO COUPON SECURITIES
Zero coupon securities are sold at a deep discount from their face value. Such
securities make no periodic interest payments; however, the buyer receives a
rate of return by the gradual appreciation of the security, until it is redeemed
at face value on a specified maturity date.
RISKS: Zero coupon securities do not pay interest until maturity and
tend to be subject to greater interim market value fluctuations in
response to interest rate changes rather than interest paying
securities of similar maturities. Credit risk is generally greater
for these investments that are required to pay interest only at
maturity rather than at intervals during the life of the investment.
PORTFOLIO TURNOVER
Portfolio turnover rates are believed to be higher than the turnover
experienced by most fixed income funds, due to the Investment Adviser's
active management of duration. This could, in turn, lead to higher
turnover costs. High portfolio turnover may involve greater brokerage
commissions and transactions costs which will be paid by the
Portfolio. In addition, high turnover rates may result in increased
short-term capital gains.
SUPPLEMENTAL INVESTMENT POLICIES
The Portfolio may invest more than 5% of its net assets in futures margins
and/or premiums on options only if it is being used for bona fide hedging
purposes.
The Portfolio may not enter into a repurchase or reverse repurchase agreement
if, as a result thereof, more than 25% of the Portfolio's total assets would be
subject to such agreements.
21
<PAGE>
FINANCIAL HIGHLIGHTS TABLE
The Financial Highlights Table is intended to help you understand the
Portfolio's financial performance for the past five years. Certain
information reflects financial results for a single Portfolio share. The
"Total Return" indicates how much an investment in the Portfolio would have
earned or lost, assuming all dividends and distributions had been reinvested.
This information for the year ended December 31, 1999 has been audited by KPMG
LLP. You will find the auditor's report and the FFTW Funds, Inc., financial
statements in the annual report, which is available upon request. Financial
Highlights for the years prior to 1999 were audited by other auditors.
FFTW FUNDS, INC.
WOLDWIDE-HEDGED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------------
FOR A SHARE OUTSTANDING DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
THROUGHOUT THE PERIOD: 1999 1998 1997 1996 1995
- - ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
- - -------------------------
Net asset value,
beginning of period $ 11.19 $ 11.23 $ 10.91 $ 10.85 $ 10.41
-------- -------- ------- ------- -------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
- - -------------------------
Investment income, net 0.51 * 0.59 0.53 0.62 0.45
Net realized and
unrealized gain (loss)
on investments,
financial futures
contracts and foreign
currency-related
transactions (0.53) 0.68 0.80 0.43 0.66
-------- -------- ------- ------- -------
Total from investment
operations (0.02) 1.27 1.33 1.05 1.11
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS
- - -------------------------
From investment income,
net 0.59 0.70 0.59 0.62 0.67
In excess of investment
income, net - - - 0.37 -
From net realized gain on
investments, financial
futures contracts and
foreign
currency-related
transactions 0.00 ** 0.61 0.42 - -
-------- -------- ------- ------- -------
Total distributions 0.59 1.31 1.01 0.99 0.67
-------- -------- ------- ------- -------
Net asset value, end of
period $ 10.58 $ 11.19 $ 11.23 $ 10.91 $ 10.85
======== ======== ======= ======= =======
TOTAL RETURN (0.19%) 11.53% 12.60% 10.03% 11.00%
- - -------------------------
RATIOS/SUPPLEMENTAL DATA
- - -------------------------
Net assets, end of period
(000's) $181,535 $174,805 $80,390 $30,024 $28,255
Ratio of operating
expenses to average net
assets, exclusive of
interest expense (a) 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of operating
expenses to average net
assets, inclusive of
interest expense (a) 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of investment
income, net to average
net assets (a) 4.70% 4.85% 5.29% 5.71% 5.84%
Decrease in above expense
ratios due to waiver of
investment advisory
fees and reimbursement
of other expenses 0.14% 0.13% 0.20% 0.24% 0.54%
Portfolio Turnover 404% 745% 704% 1,087% 500%
</TABLE>
- - --------------------------------------------------------------------------------
(a) Net of waivers and reimbursements.
* Calculation done based on average shares outstanding.
** Rounds to less than $0.01.
22
<PAGE>
SHAREHOLDER INQUIRIES
This Prospectus contains a concise statement of information investors should
know before they invest in the Portfolio. Please retain this Prospectus for
future reference. Additional information about the Portfolio's investments is
available in the Portfolio's annual and semi-annual reports to shareholders, as
well as the Statement of Additional Information (SAI) dated May 1, 2000. The SAI
provides more detailed information about the Portfolio, including its operations
and investment policies. A current SAI is on file with the Securities and
Exchange Commission and is incorporated by reference and is legally considered a
part of this Prospectus. In the Portfolio's annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Portfolio's performance during its last fiscal year.
The Portfolio's SAI, annual and semi-annual reports are available, without
charge, upon request by contacting Investors Capital, 600 Fifth Avenue, New
York, NY 10020, (800) 762-4848.
Information about the Portfolio (including the SAI) can be reviewed and copied
at the Commission's Public Reference Room in Washington, D.C. Information on the
operation of the public reference room may be obtained by calling the Commission
at 1-202-942-8090. Reports and other information about the Portfolio are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington D.C.
20549-0102 or by electronic request at the following
e-mail address: [email protected].
DISTRIBUTED BY:
FIRST FUND DISTRIBUTORS, INC.
Fund's Investment Company Act filing number: 811-5796
23
<PAGE>
FFTW FUNDS, INC.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PROSPECTUS
INTERNATIONAL PORTFOLIO
- - --------------------------------------------------------------------------------
DATED MAY 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE PORTFOLIO'S SHARES
AS AN INVESTMENT OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary 3
Investment Objectives. Principal Investment Strategies and Investments 3
Principal Investment Risks 4
Risk Return Bar Chart and Table 5
Fee Table 6
Expense Table Example 6
Fund Management 6
Shareholder Information 8
Investment Information 11
Portfolio Turnover 19
Supplemental Investment Policies 19
Financial Highlights Table 20
Shareholder Inquiries 21
</TABLE>
2
<PAGE>
RISK/RETURN SUMMARY
The following is a summary of certain key information about the International
Portfolio (the "Porfolio"), including its investment objective, principal
investment strategies and principal investment risks. A more detailed
description of the permitted investment strategies, permitted investments and
their associated risks will follow.
<TABLE>
<CAPTION>
<S><C>
Investment Objectives, Principal Investment Strategies and Investments
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
- - ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of capital.
- - ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating of AA by S&P, Aa by Moody's or a comparable
STRATEGIES: rating, or higher from a nationally recognized statistical rating organization) debt securities from
foreign bond markets and denominated in foreign currencies. The performance objective of the Portfolio is
to outperform the JP Morgan Global Government Bond Index (Non-U.S. Unhedged).
- - ------------------------------------------------------------------------------------------------------------------------------------
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: MOODY'S: (SHORT (SHORT THOMPSON: PORTFOLIO
---- -------- ------ ------ --------- ---------
TERM): TERM): QUALITY:
------ ------ --------
BBB- Baa3 A-2 P-2 B AA (Aa)
- - ------------------------------------------------------------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not differ from the average
duration of the JP Morgan Global Government Bond Index (Non-U.S. Unhedged) by more than one year. As of
December 31,1999, the duration of the JP Morgan Global Governmental Bond Index (non-U.S. Unhedged)
was 5.6 years.
- - ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in high quality debt securities from
foreign bond markets, denominated in foreign currencies. The Portfolio will maintain investments
in debt securities of issuers from at least three different countries. At least 65% of the Portfolio's
total assets will be invested in debt securities from jurisdictions outside the U.S. For temporary
defensive purposes, 100% of the Portfolio's total assets may be invested in U.S. Government securities,
cash or cash equivalent securities. These defensive strategies may prevent the Portfolio from achieving
its investment objective. The Portfolio is "non-diversified" under the 1940 Act.
- - ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL - Asset-Backed Securities
INVESTMENTS: - Corporate Debt Instruments
(See Permitted - Foreign Instruments
Investment - U.S. Government and Agency Securities
Strategies,
Investments and
Associated Risks for
a more detailed
description)
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
PRINCIPAL INVESTMENT RISKS
"Risk" is the chance that you may lose money on an investment or that you will
not earn as much as you expect. The greater the risk, the greater the
possibility of losing money.
The Portfolio is affected by changes in the economy, or in securities and other
markets.
The possibility also exists that investment decisions of portfolio managers will
not accomplish what they are designed to achieve. No assurance can be given that
the Portfolio's investment objective will be achieved.
The Portfolio may invest in Securities issued by the U.S. Government, its
agencies or sponsored enterprises. Some of these securities are backed by the
full faith and credit of the United States and others are subject to varying
degrees of risk.
Investments in the Portfolio are subject to certain of the following risks:
CORRELATION Derivatives are financial instruments whose value depends
RISK: upon, or is derived from, the value of something else, such
as one or more underlying securities, indexes or
currencies. The prices of a particular derivative
instrument may not move in the same way as the underlying
security or, in the case of a hedging transaction, of the
securities which are the subject of a hedge.
CREDIT RISK: The Portfolio may be exposed to the risk that a security's
issuer or a counterparty to a contract will default or not
be able to honor a financial obligation.
CURRENCY Fluctuations in exchange rates between the U.S. dollar and
RISK: foreign currencies may negatively affect an investment.
When synthetic and cross-hedges are used, the net exposure
of the Portfolio to any one currency may be different from
that of its total assets denominated in such currency.
FOREIGN RISK: Investing in foreign securities will expose the Portfolio
to risks such as political and economic instability,
currency devaluation and high inflation rates, which may
result in Portfolio losses and volatility.
INTEREST Investing in fixed-rate debt securities will expose the
RATE RISK: Portfolio to the risk that the value of the Portfolio's
investments will decline if interest rates rise.
LEVERAGE The use of derivatives exposes the Portfolio to the risk of
RISK: leverage which may result in greater fluctuations in the
Portfolio's net asset value than would have occurred had
the Portfolio invested in the underlying security.
LIQUIDITY Certain securities may be difficult or impossible to sell
RISK: at favorable prices within the desired time frame.
MARKET The market value of a security may increase or decrease
RISK: over time. Such fluctuations can cause a security to be
worth less than the price originally paid for it or less
than it was worth at an earlier time. Market risk may
affect a single issuer, entire industry or the market as a
whole.
NON- A non-diversified Portfolio may invest more of its assets
DIVERSIFICATION in the securities of fewer companies than a diversified
RISK: Portfolio. This vulnerability to factors affecting a single
investment can result in greater Portfolio losses and
volatility.
PREPAYMENT A portfolio that invests in mortgage-backed and other asset
RISK: backed securities is exposed to the risk that such
securities may repay the principal either faster or slower
than expected.
4
<PAGE>
RISK/RETURN BAR CHART AND TABLE
The following chart and table give some indication of the risks of investing
in the Portfolio. The chart and table illustrate the changes in the Portfolio's
yearly performance and show how the Portfolio's average annual total returns
for 1 year and since inception compare with a selected index. Past performance
is not necessarily an indication of how the Portfolio will perform in the
future.
INTERNATIONAL PORTFOLIO
AVERAGE ANNUAL TOTAL RETURN
[CHART]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
- - -0.43% 18.35% -6.34%
</TABLE>
During the three-year period shown in the International Portfolio's bar chart,
the highest quarterly return was 10.42% (quarter ending 9/30/98) and the lowest
quarterly return was -5.28% (quarter ending 3/31/99).
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST 1 PAST 5 PAST 10 SINCE
PERIODS ENDING DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION
(5/9/96)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Portfolio -6.34% N/A N/A 4.58%
- - ------------------------------------------------------------------------------------------------------------------------------------
JP Morgan Global Government Bond Index -6.18% N/A N/A 3.73%
(Non-U.S.
Unhedged)
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
FEE TABLE
This Table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
- - ---------------------------------------------------------------------------------------------
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) None
- - ---------------------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)
- - ---------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.40%
- - ---------------------------------------------------------------------------------------------
Distribution Fees (12b-1) None
- - ---------------------------------------------------------------------------------------------
Other Expenses 0.20%
- - ---------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.60%
- - ---------------------------------------------------------------------------------------------
</TABLE>
* Under an Administration Agreement effective May 29, 1998, between the Fund and
the Administrator, the Administrator provides administrative services to the
Portfolio, for an incentive fee in the event the Portfolio operates below its
expense ratio. This fee is capped at 0.02% of the Portfolio's average daily net
assets.
EXPENSE TABLE EXAMPLE
The following table is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$61 $192 $335 $750
---------------------------------------------------------------------------------------
</TABLE>
FUND MANAGEMENT
BOARD OF DIRECTORS
The Board of Directors of FFTW Funds, Inc. (the "Fund"), is responsible for the
overall management and supervision of the Portfolio, which is a series of the
Fund. The Fund's Directors are Stephen P. Casper, John C Head III, Lawrence B.
Krause, Andrea Redmond, Saul H. Hymans and Onder John Olcay. Additional
information about the Directors and the Fund's executive officers may be found
in the Statement of Additional Information under the heading "Management of the
Fund."
INVESTMENT ADVISER
Subject to the direction and authority of the Board of Directors, Fischer
Francis Trees & Watts, Inc. ("FFTW" or the "Investment Adviser") serves as
Investment Adviser to the Portfolio. The Investment Adviser continuously
conducts investment research and is responsible for the purchase, sale or
exchange of the Portfolio's assets. Organized in 1972, the Investment Adviser
is registered with the Securities and Exchange Commission and is a New York
corporation, that, with its affiliated companies currently manages
approximately $30 billion in assets for numerous fixed-income portfolios. The
Investment Adviser currently advises over 125 major institutional clients
including banks, central banks, pension funds and other institutional
clients. The average size of a client relationship with the Investment
Adviser is in excess of $200 million. The Investment Adviser also serves as
the sub-adviser to three portfolios of two other open-end management
investment companies. The Investment Adviser's offices are located at 200
Park Avenue, New York, New York 10166. The Investment Adviser is directly
wholly-owned by Charter Atlantic Corporation, a New York corporation. The
Portfolio paid the Investment Adviser for its services in the twelve months
ended December 31, 1999, at a rate of 0.40% of the Portfolio's average daily
net assets.
INVESTMENT SUB-ADVISER
6
<PAGE>
Fischer Francis Trees & Watts, a corporate partnership organized under the laws
of the United Kingdom and an affiliate of the Investment Adviser, serves as
Sub-Adviser to the Portfolio. Organized in 1989, the Sub-Adviser is a
U.S.-registered investment adviser and currently manages approximately $7.5
billion in multi-currency fixed-income portfolios for institutional clients. The
Investment Adviser pays the Sub-Adviser monthly from its advisory fee. The
Sub-Adviser's annual fee is equal to the advisory fee for the Portfolio. The
Sub-Adviser's offices are located at 3 Royal Court, The Royal Exchange, London,
EC 3V 3RA. The Sub-Adviser is directly and indirectly wholly-owned by Charter
Atlantic Corporation, a New York corporation.
PORTFOLIO MANAGERS
FFTW uses a team approach for making the strategic and sector allocations within
each of its model portfolios. For each Portfolio, a specific portfolio manager
is responsible for portfolio implementation and compliance with
Portfolio-specific and FFTW-wide investment strategy. The portfolio manager
determines the broad risk parameters under which a Portfolio operates, but
relies on specialist investment teams for the generation of ideas and specific
investments in a Portfolio. The following groups and teams assist in the
selection of specific investments, subject to the Portfolio's investment
policies and restrictions: the Duration, Country and Foreign Exchange Strategy
Group, consisting of the Foreign Exchange, U.S. Bloc, Europe and Japan teams,
and the Sector Allocation Strategy Group, consisting of the Global Credit,
Mortgages and Emerging Markets teams.
ADNAN AKANT, MANAGING DIRECTOR. Mr. Akant joined FFTW in 1984, after six
years with the World Bank, where he served as a project financial analyst in
Europe and the Middle East area before joining the treasurer's staff as an
investment officer. As a member of the investment department at the World
Bank, Mr. Akant was responsible for investment and trading of each of the
major sectors of the bank's actively managed liquidity portfolio. He was also
a member of the investment strategy committee and shared responsibility for
formulating and implementing the bank's trading and investment strategy. Mr.
Akant was later promoted to senior investment officer, and was the division's
deputy in charge of the U.S. dollar portfolio. Mr. Akant holds a Ph.D. in
systems science, an MS in finance and international management, an Engineer's
degree, and M.S. and B.S. degrees in electrical engineering, all from the
Massachusetts Institute of Technology. Mr. Akant also taught graduate and
undergraduate level courses as a teaching assistant. Mr. Akant is a member of
the New York Academy of Sciences, IEEE, and of the Sigma XI, Tau Beta Pi, and
Eta Kappa Nu honor societies.
STEWART M. RUSSELL, MANAGING DIRECTOR. Mr. Russell is responsible for management
of the Portfolio and other Portfolios of FFTW Funds, Inc. Mr. Russell joined
FFTW in 1992 from the short-term proprietary trading desk in the global markets
area of J.P. Morgan, where he was responsible for proprietary positioning of
U.S. and non-U.S. government obligations, corporate bonds, and asset-backed
securities. Prior to that, Mr. Russell managed J.P. Morgan's short-term interest
rate risk group, coordinating a $10 billion book of assets and liabilities. Mr.
Russell holds a B.A. in government from Cornell University and an M.B.A. in
finance from New York University.
7
<PAGE>
SHAREHOLDER INFORMATION
PURCHASES
Portfolio shares may be purchased directly from the Portfolio, or obtained by
employing the services of an outside broker or agent. Such broker or agent may
charge a fee for its services. The minimum initial investment in the Portfolio,
if shares are purchased directly from the Portfolio, is $100,000; such minimum
may be waived at the discretion of FFTW or the distributor, First Fund
Distributors, Inc. ("First Fund" or the "Distributor"). Subsequent investments
or redemptions may be of any amount. Initial investments, if obtained through a
broker or agent may be for amounts lower than $100,000. There are no loads or
12b-1 distribution fees imposed by the Portfolio. Shares purchased will begin
accruing dividends on the day Federal funds are received.
Purchases of shares may be made on any "Business Day," meaning any Monday
through Friday that the New York Stock Exchange is open. At the present time,
the New York Stock Exchange is closed on: New Year's Day, Dr. Martin Luther
King's Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas.
WIRING INSTRUCTIONS
To: Investors Bank & Trust Company, Boston, Massachusetts
ABA Number: 011001438
Account Name: First Fund Distributors, Inc. - Fund Purchase Account
Account Number:933333333
Reference: International Portfolio
TO PURCHASE SHARES
------------------
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
WHEN NET ASSET WHEN & HOW PROCEDURE FOR SAME DAY RESULT OF LATE NOTIFICATION OR DELAY IN
VALUE (NAV) IS SHARES MAY BE PURCHASES RECEIPT OF FUNDS
DETERMINED PURCHASED
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
All Business Days - Any Business - Purchasers must call - The Portfolio must receive notice
Day Investors Capital at (800) before 4 p.m. (wire may be received
762-4848 or (212) 332-5211 after 4 p.m. ET) for shares to be
- Submitted if within the City of New bought at that day's price.
orders must York or Investors Bank at
include a (800) 247-0473 prior to 4:00 - Shares will be bought at the next
completed p.m. ET to inform the business day's price if wire is received
account Portfolio of the incoming wire after 4:00 p.m ET and no notice is
application. transfer. given.
- Federal funds - Purchasers must indicate
must be wired which Portfolio is to be
to First Fund's purchased.
"Fund Purchase
Account" at - If Federal funds are received
Investors Bank by the Portfolio that day, the
& Trust order will be effective that
Company day. Price of shares is based
("Investors on the next calculation of
Bank"). NAV after the order is
placed.
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
REDEMPTIONS
All Portfolio shares (fractional and full) will be redeemed upon shareholder
request. The redemption price will be the next net asset value per share,
determined after the Transfer Agent receives proper notice of redemption (see
table below). Shares redeemed receive dividends declared up to, and including
the day preceding the day of the redemption payment.
Shares may be redeemed by employing the services of an outside broker or agent
or may be redeemed directly from the Portfolio. Such broker or agent may charge
a fee for its services. There are no loads or 12b-1 distribution fees imposed by
the Portfolio. No charge is imposed by the Portfolio to redeem shares; however,
a shareholder's bank may impose its own wire transfer fee for receipt of the
wire. The Portfolio may execute redemptions in any amount requested by the
shareholder up to the amount the shareholder has invested in the Portfolio.
A shareholder may change its authorized agent or the account designated to
receive redemption proceeds at any time by writing to the Transfer Agent with an
appropriate signature guarantee. Further documentation may be required when
deemed appropriate by the Transfer Agent.
A telephone redemption option is made available to shareholders on the
Portfolio's Account Application. The Portfolio or the Transfer Agent may employ
procedures designed to confirm that instructions communicated by telephone are
genuine. If the Portfolio does not employ such procedures, it may be liable for
losses due to unauthorized or fraudulent instructions. The Portfolio or the
Transfer Agent may require personal identification codes and will only wire
funds through pre-existing bank account instructions. No bank instruction
changes will be accepted via telephone.
In an attempt to reduce expenses, the Portfolio may redeem shares of any
shareholder whose Portfolio account has a net asset value lower than $100,000. A
shareholder's account may be involuntarily redeemed should the account value
fall below minimum investment requirements. An involuntary redemption will not
occur when drops in investment value are the sole result of adverse market
conditions. The Portfolio will give 60 days prior written notice to shareholders
whose shares are being redeemed to allow them to purchase sufficient additional
shares of the Portfolio to avoid such redemption. The Portfolio also may redeem
shares in a shareholder's account as reimbursement for loss due to the failure
of a check or wire to clear in payment of shares purchased.
TO REDEEM SHARES
----------------
<TABLE>
<CAPTION>
<S><C>
- - --------------------------------------------------------------------------------------------------------------------------------
1. SHAREHOLDERS MUST PROVIDE THE FOLLOWING INFORMATION:
a. The dollar or share amount to be redeemed;
b. The account to which the redemption proceeds should be wired (this account will have been previously designated by the
shareholder on its Account Application Form);
c. The name of the shareholder; and
d. The shareholder's account number
2. SHAREHOLDERS SHOULD CALL THE TRANSFER AGENT AT (800) 247-0473 OR INVESTORS CAPITAL SERVICES AT (800) 762-4848 TO REQUEST A
REDEMPTION.
3. IN THE CASE OF FOREIGN EXCHANGES, THE PORTFOLIO'S NAV MAY CHANGE WHEN SHAREHOLDERS CANNOT BUY OR SELL SHARES.
- - --------------------------------------------------------------------------------------------------------------------------------
WHEN REDEMPTION EFFECTIVE RESULT OF LATE NOTIFICATION OF REDEMPTION
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
If notice is received by the Transfer Agent by 4:00 p.m. ET on any If notice is received by the Transfer Agent on a non-
Business Day, the redemption will be effective and payment will business day or after 4:00 p.m. ET time on a Business
be made within seven calendar days, but generally two business Day, the redemption notice will be deemed received as of
days following receipt of such notice. Price of shares is based on the next Business Day.
the next calculation of the NAV after the order is placed.
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
PRICING OF PORTFOLIO SHARES
Your price for Portfolio shares is the Portfolio's net asset value per share.
Portfolio net asset value is calculated by: (1) adding the market value of all
the Portfolio's assets, (2) subtracting all of the Portfolio's liabilities, and
then (3) dividing by the number of shares outstanding and adjusting to the
nearest cent. The net asset value of the Portfolio is calculated by the
Portfolio's Accounting Agent as of 4:00 p.m. ET on each Business Day.
All Portfolio investments are valued daily at their market price, which
results in unrealized gains or losses. Readily marketable fixed-income
securities are valued on the basis of prices provided by a pricing service
when such prices are believed by the Investment Adviser to reflect the fair
value of such securities. Securities traded on an exchange are valued at
their last sales price on that exchange. Securities and other financial
instruments for which over-the-counter market quotations are available are
valued at the latest bid price (asked price for short sales). Time deposits
and repurchase agreements are generally valued at their cost plus accrued
interest. Securities for which market quotations are not readily available
will be valued in good faith by methods approved by the Board of Directors.
Securities with maturities less than 60 days are valued at amortized cost,
which approximates market value, unless this method does not represent fair
value.
DIVIDENDS
If desired, shareholders must request to receive dividends in cash (payable
on the first Business Day of the following month) on the Account Application
Form. Absent such notice, all dividends will be automatically reinvested in
additional shares on the last business day of each month at the share's net
asset value. In the event that the Portfolio realizes net short-term or
long-term capital gains (i.e., with respect to assets held more than one
year), the Portfolio will distribute such gains by automatically reinvesting
(unless a shareholder has elected to receive cash) them in additional
Portfolio shares.
Net investment income (including accrued but unpaid interest, amortization of
original issue and market discount or premium) of the Portfolio will be declared
as a dividend payable daily to shareholders of record as of the close of each
Business Day.
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other shareholder voting matters. Matters to be acted upon affecting the
Portfolio (such as approval of the investment advisory agreement with the
Investment Adviser or the submission of changes to fundamental Portfolio
investment policy) require the affirmative vote of the Portfolio shareholders.
The election of the Fund's Board of Directors and the approval of the Fund's
independent auditors are voted upon by shareholders on a Fund-wide basis. The
Fund is not required to hold annual shareholder meetings. Shareholder approval
will be sought only for certain changes in the Fund's or the Portfolio's
operation and for the election of Directors under certain circumstances.
Directors may be removed by shareholders at a special meeting. The Directors
shall call a special meeting of the Portfolio upon written request of
shareholders owning at least 10% of the Portfolio's outstanding shares.
TAX CONSIDERATIONS
The following discussion is for general information only. An investor should
consult with his or her own tax adviser as to the tax consequences of an
investment in the Portfolio, including the status of distributions from the
Portfolio under applicable state or local law. For additional information
regarding tax issues pertaining to the Portfolio, see "Supplemental Tax
Considerations" in the Statement of Additional Information.
10
<PAGE>
FEDERAL INCOME TAXES
- - --------------------
The Portfolio will distribute all of its taxable income by automatically
reinvesting such income in additional Portfolio shares and distributing those
shares to its shareholders, unless a shareholder elects on the Account
Application Form to receive cash payments for such distributions. Shareholders
receiving distributions from the Portfolio in the form of additional shares will
be treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such a distribution.
Dividends the Portfolio pays from its investment company taxable income
(including interest and net short-term capital gains) will be taxable to U.S.
shareholders as ordinary income, whether received in cash or in additional
Portfolio shares. Designated distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses) are generally
taxable to shareholders at the applicable long-term capital gains rates,
regardless of how long they have held their Portfolio shares. If a portion of
the Portfolio's income consists of dividends paid by U.S. corporations, a
portion of the dividends paid by the Portfolio may be eligible for the corporate
dividends-received deduction.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by the Portfolio in October, November or December with a
record date in any such month and paid by the Portfolio during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. The Portfolio will inform
shareholders of the amount and tax status of all amounts treated as distributed
to them not later than 60 days after the close of each calendar year.
If a shareholder holds shares through a tax-deferred account, such as a
retirement plan, income and gains will not be taxable each year. Instead, the
taxable portion of amounts held in a tax-deferred account generally will be
subject to tax only when a distribution is made from that account.
A shareholder who sells or redeems Portfolio shares will generally realize a
capital gain or loss, which will be long-term or short-term, generally depending
upon the shareholder's holding of the shares. An exchange of shares may be
treated as a sale.
As with all mutual funds, the Portfolio may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who:
1. fail to provide the Portfolio with a correct taxpayer identification
number, or
2. fail to make required certifications, or
3. have been notified by the IRS that they are subject to backup withholding.
Backup withholding is not an additional tax; rather, it is a way in which the
IRS ensures it will collect taxes otherwise due. Any amount withheld may be
credited against U.S. federal income tax liability.
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the Portfolio and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Portfolio or its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors in the
Portfolio should consult their tax advisers with specific reference to their own
tax situation.
STATE AND LOCAL TAXES
- - ---------------------
The Portfolio may be subject to state, local or foreign taxation in any
jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes. Portfolio
distributions derived from interest on obligations of the U.S. Government and
certain of its agencies, authorities and instrumentalities may be exempt from
state and local taxes in certain states. Shareholders should consult their own
tax advisers regarding possible state and local income tax exclusions for
dividend portions paid by the Portfolio, which are attributable to interest from
obligations of the U.S. Government, its agencies, authorities and
instrumentalities.
DISTRIBUTION OF PORTFOLIO SHARES
Shares of the Portfolio are distributed by First Fund Distributors, Inc.
("First Fund"), pursuant to a Distribution Agreement dated as of January 1,
2000 by and among the Fund, Investors Bank & Trust Company and First Fund. No
fees are payable by the Fund pursuant to the Distribution Agreement. Investors
Bank & Trust Company pays the distribution fee while FFTW pays all other fees
and expenses related to distribution.
11
<PAGE>
INVESTMENT INFORMATION
PERMITTED INVESTMENT STRATEGIES, INVESTMENTS AND ASSOCIATED
RISKS
Primary Investments
- - - Asset-Backed Securities
- - - Corporate Debt Instruments
- - - Duration Management
- - - Foreign Instruments
- - - U.S. Government and Agency Securities
Other Investments
- - - Bank Obligations
- - - Brady Bonds
- - - Dollar Roll Transactions
- - - Hedging
- - - Illiquid Securities
- - - Indexed Notes, Currency Exchange-Related Securities and Similar Securities
- - - Inflation-Indexed Securities
- - - Investment Companies
- - - Mortgage-Backed Securities
- - - Multi-National Currency Unit Securities or More Than One Currency
Denomination
- - - Repurchase and Reverse Repurchase Agreements
- - - Stripped Investments
- - - TBA Transactions
- - - Total Return Swaps
- - - When Issued and Forward Commitment Securities
- - - Zero Coupon Securities
ASSET-BACKED SECURITIES
- - -----------------------
Asset-backed securities are secured by or backed by assets other than
mortgage-related assets, such as automobile and credit card receivables. These
securities are sponsored by such institutions as finance companies, finance
subsidiaries of industrial companies and investment banks. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities; however, the underlying assets are not first lien mortgage loans or
interests, but include assets such as:
a. motor vehicle installment sale contracts,
b. other installment sale contracts,
c. leases of various types of real and personal property, and
d. receivables from revolving credit (credit card) agreements.
RISKS: The principal amount of asset-backed securities is generally
subject to partial or total prepayment risk. If an asset-backed
security is purchased at a premium or discount to par, a prepayment
rate that is faster than expected will reduce or increase,
respectively, the yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect on yield to
maturity. These securities may not have any security interest in the
underlying assets, and recoveries on the repossessed collateral may
not, in some cases, be available to support payments on these
securities.
BANK OBLIGATIONS
- - ----------------
Bank obligations are bank-issued securities. These instruments include, but are
not limited to:
a. Time Deposits, e. Deposit Notes, h. Variable Rate Notes,
12
<PAGE>
<TABLE>
<S><C>
b. Certificates of Deposit, f. Eurodollar Time deposits, i. Loan Participations,
c. Bankers' Acceptances, g. Eurodollar Certificates of j. Variable Amount Master Demand Notes,
d. Bank Notes, Deposit, k. Yankee CDs, and
l. Custodial Receipts
</TABLE>
RISKS: Investing in bank obligations exposes the Portfolio to
risks associated with the banking industry such as interest rate
and credit risks.
BRADY BONDS
- - -----------
Brady Bonds are debt securities, issued or guaranteed by foreign governments in
exchange for existing external commercial bank indebtedness. To date, over $109
billion (face amount) of Brady Bonds have been issued by the governments of
seventeen countries, the largest proportion having been issued by Argentina,
Brazil, Mexico and Venezuela. Brady Bonds are either collateralized or
uncollateralized, issued in various currencies (primarily the U.S. dollar), and
are actively traded in the over-the-counter secondary market.
The Portfolio may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
RISKS: Brady Bonds are generally issued by countries with
developing capital markets or unstable governments and as such,
are considered to be among the more risky international
investments.
CORPORATE DEBT INSTRUMENTS
- - --------------------------
Corporate bonds are debt instruments issued by private corporations. As
creditors, bondholders have a prior legal claim over common and preferred
stockholders of the corporation as to both income and assets for the
principal and interest due to the bondholder. The Portfolio purchases
corporate bonds subject to quality restraints. Commercial paper, notes and
other obligations of U.S. and foreign corporate issuers (including medium-term
and variable rate notes) must meet the Portfolio's credit quality standards.
The Portfolio may retain a downgraded corporate debt security if the
Investment Adviser determines retention of such security to be in the
Portfolio's best interests.
RISKS: Investing in corporate debt securities subjects the
Portfolio to interest rate changes and credit risks.
DOLLAR ROLL TRANSACTIONS
- - ------------------------
Dollar roll transactions consist of the sale of mortgage-backed securities, with
a commitment to purchase similar, but not identical securities at a future date,
and at the same price. The Portfolio will maintain a segregated custodial
account for dollar roll transactions. The segregated accounts may contain cash,
U.S. Government Securities or other liquid, unencumbered securities having an
aggregate value at least equal to the amount of such commitments to repurchase
the securities under the dollar roll transaction (including accrued interest).
RISKS: Should the broker-dealer to whom the Portfolio sells an
underlying security of a dollar roll transaction become
insolvent, the Portfolio's right to purchase or repurchase the
security may be restricted, or the price of the security may
change adversely over the term of the dollar roll transaction.
DURATION MANAGEMENT
- - -------------------
Duration measures a bond's price volatility, incorporating the following
factors:
a. the bond's yield,
b. coupon interest payments,
c. final maturity,
d. call features, and
e. prepayment assumptions.
13
<PAGE>
Duration measures the expected life of a debt security on a present value basis.
It incorporates the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled (or in the case
of a callable bond, expected to be received) and weighs them by the present
values of the cash to be received at each future point in time. For any debt
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, for the same maturity, the
lower the stated or coupon rate of interest of a debt security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a debt security, the shorter the duration of the security.
Futures, options and options on futures have durations closely related to the
duration of the securities that are underlying them. Holding long futures or
call options will lengthen the Portfolio's duration by approximately the same
amount that holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions and have the
effect of reducing duration by approximately the same amount that selling an
equivalent amount of the underlying securities would. The market price of a bond
with a duration of two years would be expected to decline 2% if interest rates
rose 1%. If a bond has an effective duration of three years, a 1% increase in
general interest rates would be expected to cause the bond's value to decline by
about 3%.
RISKS: Changes in weighted average duration of the Portfolio's
holdings are not likely to be so large as to cause them to fall
outside the ranges specified above. There is no assurance that
deliberate changes in the Portfolio's weighted average duration
will enhance its return relative to more static duration policies
or Portfolio structures. In addition, it may detract from its
relative return.
FOREIGN INSTRUMENTS
- - -------------------
a. FOREIGN SECURITIES
Foreign securities are securities denominated in currencies other than the U.S.
dollar and may be denominated in any single currency or multi-currency units.
The Investment Adviser and the Sub-Adviser will adjust exposure of the Portfolio
to different currencies based on their perception of the most favorable markets
and issuers. In allocating assets among multiple markets, the Investment Adviser
and the Sub-Adviser will assess the relative yield and anticipated direction of
interest rates in particular markets, general market and economic conditions and
the relationship of currencies of various countries to each other. In their
evaluations, the Investment Adviser and the Sub-Adviser will use internal
financial, economic and credit analysis resources as well as information
obtained from external sources.
The Portfolio will invest primarily in securities denominated in the currencies
of the United States, Japan, Canada, Western European nations, New Zealand and
Australia, as well as securities denominated in the Euro and the European
Currency Unit. Further, it is anticipated that such securities will be issued
primarily by governmental and private entities located in such countries and by
supranational entities. The Portfolio will only invest in countries considered
to have stable governments, based on the Investment Adviser's analysis of
social, political and economic factors.
b. FOREIGN GOVERNMENT, INTERNATIONAL AND SUPRANATIONAL AGENCY SECURITIES
These securities include debt obligations issued or guaranteed by a foreign
government or its subdivisions, agencies and instrumentalities, international
agencies and supranational entities.
RISKS: Generally, foreign financial markets have substantially
less volume than the U.S. market. Securities of many foreign
companies are less liquid, and their prices are more volatile
than securities of comparable domestic companies. The Portfolio
may invest portions of its assets in securities denominated in
foreign currencies. These investments carry risks of fluctuations
of exchange rates relative to the U.S. dollar. Securities issued
by foreign entities (governments, corporations etc.) may involve
risks not associated with U.S. investments, including
expropriation of assets, taxation, political or social
instability and low financial reporting standards--all of which
may cause declines in investment returns.
c. EMERGING MARKETS SECURITIES
Emerging markets securities are foreign securities issued from countries which
are considered to be "emerging" or "developing" by the Morgan Stanley Composite
Index (MSCI) or by the World Bank. Such
14
<PAGE>
emerging markets include all markets other than Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Hong Kong, Japan, the
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the
United Kingdom and the United States.
RISKS: The risks of investing in foreign securities may be
intensified when the issuers are domiciled or doing substantial
business in emerging market countries or countries with
developing capital markets. Security prices in emerging markets
can be significantly more volatile than those in more developed
nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. Emerging
market countries may have:
<TABLE>
<S><C>
a. Relatively unstable governments; d. restrictions on foreign ownership;
b. present the risk of sudden adverse government action; e. prohibitions of repatriation of assets; or
c. nationalization of businesses; f. less protection of property rights than
more developed countries
</TABLE>
The economies of countries with emerging markets may be
predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and
may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times.
Transaction settlement procedures may be less reliable in
emerging markets than in developed markets. Securities of issuers
located in countries with emerging markets may have limited
marketability and may be subject to more abrupt or erratic price
movements.
HEDGING
- - -------
Hedging techniques are used to offset certain investment risks. Such risks
include: changes in interest rates, changes in foreign currency exchange rates
and changes in securities and commodity prices. Hedging techniques are commonly
used to minimize a given instrument's risks of future gain or loss. Hedging
techniques include:
<TABLE>
<S><C>
a. engaging in swaps; d. purchasing and selling futures contracts; and
b. purchasing and selling caps, floors and collars; e. purchasing and selling options.
c. purchasing or selling forward exchange contracts;
</TABLE>
All hedging instruments described below constitute commitments by the Portfolio
and therefore require the Portfolio to segregate cash (in any applicable
currency), U.S. Government securities or other liquid and unencumbered
securities (in any applicable currency) equal to the amount of the Portfolio's
obligations in a separate custody account.
When the Portfolio purchases a futures or forward currency contract for
non-hedging purposes, the sum of the segregated assets plus the amount of
initial and variation margin held in the broker's account, if applicable, must
equal the market value of the futures or forward currency contract.
When the Portfolio sells a futures or forward currency contract for non-hedging
purposes, the Portfolio will have the contractual right to acquire:
1. the securities,
2. the foreign currency subject to the futures, or
3. the forward currency contract.
The Portfolio will segregate assets, in an amount at least equal to the market
value of the securities or foreign currency underlying the futures or forward
currency contract.
Should the market value of the contract move adversely to the Portfolio, or if
the value of the securities in the segregated account declines, the Portfolio
will be required to deposit additional cash or securities in the segregated
account at a time when it may be disadvantageous to do so.
The Portfolio will not enter into any swaps, caps or floors unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either A or A-1 or better by S&P or A or P-1 or better by Moody's. If
unrated, it must be determined to be of comparable quality by the Investment
Adviser.
15
<PAGE>
a. SWAPS
Swaps are commonly used for hedging purposes. Hedging involving mortgage and
interest rate swaps may enhance total return. Interest rate swaps involve the
Portfolio's exchange with another party of their respective commitments to pay
or receive interest, such as an exchange of fixed rate payments for floating
rate payments. Mortgage swaps are similar to interest rate swaps, both represent
commitments to pay and receive funds. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
b. CAPS, FLOORS AND COLLARS
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar incorporates a cap and
a floor in one transaction as described above.
c. FORWARD FOREIGN EXCHANGE CONTRACTS
A forward foreign exchange contract is the purchase or sale of a foreign
currency, on a specified date, at an exchange rate established before the
currency's payment and delivery to hedge the currency exchange risk associated
with its assets or obligations denominated in foreign currencies. Synthetic
hedging is a technique utilizing forward foreign exchange contracts that is
frequently employed by the Portfolio. It entails entering into a forward
contract to sell a currency, the changes in value of which are generally
considered to be linked to a currency or currencies in which some or all of the
Portfolio's securities are or are expected to be denominated, and buying U.S.
dollars. There is a risk that the perceived linkage between various currencies
may not be present during the particular time that the Portfolio is engaging in
synthetic hedging. The Portfolio may also cross-hedge currencies by entering
into forward contracts to sell one or more currencies that are expected to
decline in value relative to other currencies to which the Portfolio has or
expects to have exposure.
d. FUTURES CONTRACTS
A futures contract is an agreement to buy or sell a specific amount of a
financial instrument at a particular price on a specified date. The futures
contract obligates the buyer to purchase the underlying commodity and the seller
to sell it. Losses from investing in futures transactions that are unhedged or
uncovered are potentially unlimited. Substantially all futures contracts are
closed out before settlement date or called for cash settlement. A futures
contract is closed out by buying or selling an identical offsetting futures
contract that cancels the original contract to make or take delivery. At times,
the ordinary spreads between values in the cash and futures markets, due to
differences in the character of these markets, are subject to distortions. The
possibility of such distortions means that a correct forecast of general market,
foreign exchange rate or interest rate trends may not produce the Portfolio's
intended results.
e. OPTIONS CONTRACTS
An option is a contractual right, but not an obligation, to buy (call) or sell
(put) property that is guaranteed in exchange for an agreed upon sum. If the
right is not exercised within a specified period of time, the option expires and
the option buyer forfeits the amount paid. An option may be a contract that
bases its value on the performance of an underlying bond. When the Portfolio
writes a call option, it gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open. A put option gives the purchaser, in return for
a premium, the right, for a specified period or time, to sell the securities or
currency subject to the option to the writer of the put at the specified
exercise price. The writer of the put option, in return for the premium, has the
obligation, upon exercise of the option, to acquire the securities or currency
underlying the option at the exercise price. The Portfolio might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
RISKS: Hedging involves risks of imperfect correlation in price
movements of the hedge and movements in the price of the hedged
security. If interest or currency exchange rates do not move in
the direction of the hedge, the Portfolio will be in a worse
position than if hedging had not been employed. As a result, it
will lose all or part of the benefit of the favorable rate
movement due to the cost of the hedge or offsetting positions.
Hedging transactions not entered into on an U.S. or foreign
16
<PAGE>
exchange may subject the Portfolio to exposure to the credit risk
of its counterparty. Futures and options transactions entail
special risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements
in the related Portfolio position could create the possibility
that losses will be greater than gains in the value of the
Portfolio's position. Other risks include the risk that the
Portfolio could not close out a futures or options position when
it would be most advantageous to do so.
ILLIQUID SECURITIES
- - -------------------
Illiquid securities cannot be sold or disposed of in the ordinary course of
business within seven days for approximately the value at which the Portfolio
has valued the securities. These include:
1. securities with legal or contractual restrictions on resale,
2. time deposits, repurchase agreements and dollar roll transactions having
maturities longer than seven days, and
3. securities not having readily available market quotations.
Although the Portfolio is allowed to invest up to 15% of the value of its net
assets in illiquid assets, it is not expected that the Portfolio will invest a
significant portion of its assets in illiquid securities. The Investment Adviser
monitors the liquidity of such restricted securities under the supervision of
the Board of Directors.
The Portfolio may purchase securities not registered under the Securities Act of
1933 as amended, (the "1933 Act"), but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act. The Portfolio
may also invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the 1933 Act
(Section 4(2) paper). Section 4(2) paper is restricted as to disposition under
the federal securities laws, and generally is sold to institutional investors.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
is normally resold to other institutional investors through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not determined
to be liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The Investment Adviser will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors.
RISKS: Investing in illiquid securities presents the potential
risks of tying up the Portfolio's assets at a time when
liquidating assets may be necessary to meet debts and
obligations.
INDEXED NOTES, CURRENCY EXCHANGE-RELATED SECURITIES AND SIMILAR SECURITIES
- - --------------------------------------------------------------------------
These securities are notes, the principal amount of which and/or the rate of
interest payable are determined by reference to an index. This index may be
determined by the rate of exchange between the specified currency for the note
and one or more other currencies or composite currencies.
RISKS: Foreign currency markets can be highly volatile and are
subject to sharp price fluctuations. A high degree of leverage is
typical for foreign currency instruments in which the Portfolio
may invest.
INFLATION-INDEXED SECURITIES
- - ----------------------------
Inflation-indexed securities are linked to the inflation rate from worldwide
bond markets such as the U.S. Treasury Department's "inflation-protection"
issues. The initial issues are ten-year notes, which are issued quarterly. Other
maturities will be sold at a later date. The principal is adjusted for inflation
(payable at maturity) and the semi-annual interest payments equal a fixed
percentage of the inflation adjusted principal amount. The inflation adjustments
are based upon the Consumer Price Index for Urban Consumers. These securities
may be eligible for coupon stripping under the U.S. Treasury program. In
addition to the U.S. Treasury's issues, inflation-indexed securities include
inflation-indexed securities from other countries such as Australia, Canada, New
Zealand, Sweden and the United Kingdom.
RISKS: If the periodic adjustment rate measuring inflation falls,
the principal value of inflation-indexed bonds will be adjusted
downward, and consequently the interest payable on these
securities (calculated with respect to a smaller principal
amount) will be reduced. Repayment of the original bond principal
upon maturity (as adjusted for inflation) is guaranteed in the
case of U.S. Treasury inflation-indexed bonds, even during a
period of deflation. The current market value of the bonds is
17
<PAGE>
not guaranteed, and will fluctuate. The Portfolio also may invest
in other inflation related bonds that may or may not provide a
similar guarantee. If a guarantee of principal is not provided,
the adjusted principal value of the bond repaid at maturity may
be less than the original principal.
The U.S. Treasury has only recently begun issuing
inflation-indexed bonds. As such, there is limited trading
history for these securities, and there can be no assurance that
a liquid market in these instruments will develop, although one
is expected to continue to evolve. Lack of a liquid market may
impose the risk of higher transaction costs and the possibility
that the Portfolio may be forced to liquidate positions when it
would not be advantageous to do so. Finally, there can be no
assurance that the Consumer Price Index for Urban Consumers will
accurately measure the real rate of inflation in the price of
goods and services.
INVESTMENT COMPANIES
- - --------------------
An investment company is an investment vehicle, which, for a management fee,
invests the pooled funds of investors in securities appropriate for its
investment objectives. Two basic types of investment companies exist:
1. Open end funds: these funds have a floating number of outstanding shares
and will sell or redeem shares at their current net asset value,
2. Closed end funds: these funds have a fixed number of outstanding shares that
are traded on an exchange.
The Portfolio will not invest in any funds classified as "load funds."
The acquiring company may not purchase or otherwise acquire securities in the
acquired company (if no-load) if, immediately after the acquisition, the
acquiring company and any company controlled by it would own in the aggregate
more than 3% of the total outstanding voting stock of the acquired company or
would not otherwise comply with any requirements under the Investment Company
Act of 1940.
The Portfolio may invest in another Portfolio within the FFTW Funds, Inc.
family. This is commonly referred to as cross-portfolio investing. Should such
cross-portfolio investing occur, investors will not be double-charged advisory
fees. The Portfolio in which it is directly invested will only charge investors
an advisory fee.
RISKS: Generally, risks posed by a particular fund will mirror
those posed by the underlying securities. A money market fund has
the highest safety of principal, whereas bond funds are
vulnerable to interest rate movements.
MORTGAGE-BACKED SECURITIES
- - --------------------------
Mortgage-backed securities are securities representing ownership interests in,
or debt obligations secured entirely or primarily by, "pools" of residential or
commercial mortgage loans or other mortgage-backed securities. Mortgage-backed
securities may take a variety of forms, the most common being:
1. Mortgage-pass through securities issued by
a. the Government National Mortgage Association (Ginnie Mae),
b. the Federal National Mortgage Association (Fannie Mae),
c. the Federal Home Loan Mortgage Corporation (Freddie Mac),
d. commercial banks, savings and loan associations, mortgage banks or by
issuers that are affiliates of or sponsored by such entities,
2. Collateralized mortgage obligations (CMOs) which are debt obligations
collateralized by such assets, and
3. Commercial mortgage-backed securities.
The Investment Adviser expects that new types of mortgage-backed securities may
be created offering asset pass-through and asset-collateralized investments in
addition to those described above by governmental, government-related and
private entities. As new types of mortgage-related securities are developed and
offered to investors, the Investment Adviser will consider whether it would be
appropriate for such Portfolio to make investments in them.
CMOs are derivatives collateralized by mortgage pass-through securities. Cash
flows from mortgage pass-through securities are allocated to various tranches in
a predetermined, specified order. Each tranche has a
18
<PAGE>
stated maturity - the latest date by which the tranche can be completely repaid,
assuming no prepayments - and has an average life - the average of the time to
receipt of a principal payment weighted by the size of the principal payment.
The average life is typically used as a proxy for maturity because the debt is
amortized, rather than being paid off entirely at maturity.
RISKS: The Portfolio may invest in mortgage-backed and other
asset-backed securities carrying the risk of a faster or slower
than expected prepayment of principal which may affect the
duration and return of the security. Portfolio returns will be
influenced by changes in interest rates. Changes in market yields
affect the Portfolio's asset value since Portfolio debt will
generally increase in value when interest rates fall and decrease
when interest rates rise. Compared to debt that cannot be prepaid,
mortgage-backed investments are less likely to increase in value
during periods of declining interest rates and have a higher risk
of decline in value during periods of rising interest rates.
Thus, interest rates have an inverse relationship with
corresponding market values. Prices of shorter-term securities
generally fluctuate less in response to interest rate changes
than do longer-term securities.
MULTI-NATIONAL CURRENCY UNIT SECURITIES OR MORE THAN ONE CURRENCY DENOMINATION
- - ------------------------------------------------------------------------------
Multi-national currency unit securities are tied to currencies of more than one
nation. This includes the European Currency Unit--a "basket" consisting of
specified currencies of the member states of the European Community (a Western
European economic cooperative organization). These securities include securities
denominated in the currency of one nation, although it is issued by a
governmental entity, corporation or financial institution of another nation.
RISKS: Investments involving multi-national currency units are
subject to changes in currency exchange rates which may cause the
value of such invested securities to decrease relative to the
U.S. dollar.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
- - --------------------------------------------
Under a repurchase agreement, a bank or securities firm (that is a dealer in
U.S. Government Securities reporting to the Federal Reserve Bank of New York) or
the Fund's Custodian agrees to sell U.S. Government Securities to the Portfolio
and repurchase such securities from the Portfolio for an agreed price at a later
date. Under a reverse repurchase agreement, a primary or reporting dealer in
U.S. Government Securities purchases U.S. Government Securities from the
Portfolio and the Portfolio agrees to repurchase the securities for an agreed
price at a later date.
The Portfolio will maintain a segregated custodial account for its reverse
repurchase agreements. Until repayment is made, the segregated accounts may
contain cash, U.S. Government Securities or other liquid, unencumbered
securities having an aggregate value at least equal to the amount of such
commitments to repurchase (including accrued interest). Repurchase and reverse
repurchase agreements will generally be restricted to those maturing within
seven days.
RISKS: If the other party to a repurchase and/or reverse
repurchase agreement becomes subject to a bankruptcy or other
insolvency proceeding, or fails to satisfy its obligations
thereunder, delays may result in recovering cash or the
securities sold, or losses may occur as to all or part of the
income, proceeds or rights in the security.
STRIPPED INSTRUMENTS
- - --------------------
Stripped instruments are bonds, reduced to its two components: its rights to
receive periodic interest payments (IOs) and rights to receive principal
repayments (POs). Each component is then sold separately. Such instruments
include:
a. Municipal Bond Strips
b. Treasury Strips
c. Stripped Mortgage-Backed Securities
RISKS: POs do not pay interest, its return is solely based on
payment of principal at maturity. Both POs and IOs tend to be
subject to greater interim market value fluctuations in response
to changes in interest rates. Stripped Mortgage-Backed Securities
IOs run the risk of unanticipated prepayment, which will decrease
the instrument's overall return.
TBA (TO BE ANNOUNCED) TRANSACTIONS
- - ----------------------------------
19
<PAGE>
In a TBA transaction, the type of mortgage-backed securities to be delivered
is specified at the time of trade, but the actual pool numbers of the
securities to be delivered are not known at the time of the trade. For
example, in a TBA transaction, an investor could purchase $1 million 30 year
mortgage-backed securities issued by the Federal National Mortgage
Association and receive up to three pools on the settlement date. The pool
numbers to be delivered at settlement will be announced shortly before
settlement takes place. Agency pass-through mortgage-backed securities are
usually issued on a TBA basis. The Portfolio will maintain a segregated
custodial account containing cash, U.S. Government securities or other liquid
and unencumbered securities having a value at least equal to the aggregate
amount of the Portfolio's TBA transactions.
RISKS: The value of the security on the date of delivery may be
less than its purchase price, presenting a possible loss of asset
value.
TOTAL RETURN SWAPS
- - ------------------
A total return swap is an exchange of one security for another. Unlike a hedge
swap, a total return swap is solely entered into as a derivative investment to
enhance total return.
RISKS: A total return swap may result in the Portfolio obtaining
an instrument, which for some reason, does not perform as well as
the original swap instrument. Additionally, potential risks of
default also exist on the part of the counterparty.
U.S. GOVERNMENT AND AGENCY SECURITIES AND GOVERNMENT-SPONSORED
ENTERPRISES/FEDERAL AGENCIES
- - --------------------------------------------------------------
U.S. Government and agency securities are issued by or guaranteed as to
principal and interest by the U.S. Government, its agencies or instrumentalities
and supported by the full faith and credit of the United States. The Portfolio
also may invest in other securities which may be issued by a U.S.
Government-sponsored enterprise or federal agency, and supported either by its
ability to borrow from the U.S. Treasury or by its own credit standing. Such
securities do not constitute direct obligations of the United States but are
issued, in general, under the authority of an Act of Congress. The universe of
eligible securities in these categories include those sponsored by:
a. U.S. Treasury Department,
b. Farmer's Home Administration,
c. Federal Home Loan Mortgage Corporation,
d. Federal National Mortgage Association,
e. Student Loan Marketing Association, and
f. Government National Mortgage Association.
RISKS: Investing in securities backed by the full faith and
credit of the U.S. Government are guaranteed only as to interest
rate and face value at maturity, not its current market price.
WHEN ISSUED AND FORWARD COMMITMENT SECURITIES
- - ---------------------------------------------
The purchase of a when issued or forward commitment security will be recorded on
the date the Portfolio enters into the commitment. The value of the security
will be reflected in the calculation of the Portfolio's net asset value. The
value of the security on delivery date may be more or less than its purchase
price. Generally, no interest accrues to the Portfolio until settlement. The
Portfolio will maintain a segregated custodial account containing cash, U.S.
Government securities or other liquid and unencumbered securities having a value
at least equal to the aggregate amount of the Portfolio's when issued and
forward commitments transactions.
RISKS: The value of the security on the date of delivery may be
less than its purchase price, presenting a possible loss of asset
value.
ZERO COUPON SECURITIES
- - ----------------------
Zero coupon securities are sold at a deep discount from their face value. Such
securities make no periodic interest payments; however, the buyer receives a
rate of return by the gradual appreciation of the security, until it is redeemed
at face value on a specified maturity date.
20
<PAGE>
RISKS: Zero coupon securities do not pay interest until maturity
and tend to be subject to greater interim market value
fluctuations in response to interest rate changes rather than
interest paying securities of similar maturities. Credit risk is
generally greater for these investments that are required to pay
interest only at maturity rather than at intervals during the
life of the investment.
PORTFOLIO TURNOVER
Portfolio turnover rates are believed to be higher than the turnover experienced
by most fixed income funds, due to the Investment Adviser's active management of
duration. This could, in turn, lead to higher turnover costs. High portfolio
turnover may involve greater brokerage commissions and transactions costs which
will be paid by the Portfolio. In addition, high turnover rates may result in
increased short-term capital gains.
SUPPLEMENTAL INVESTMENT POLICIES
The Portfolio may invest more than 5% of its net assets in futures margins
and/or premiums on options only if it is being used for bona fide hedging
purposes.
FINANCIAL HIGHLIGHTS TABLE
The Financial Highlights Table is intended to help you understand the
Portfolio's financial performance for the past five years, or, if shorter,
the period of the Portfolio's operations. Certain information reflects
financial results for a single Portfolio share. The "Total Return" indicates
how much an investment in the Portfolio would have earned or lost, assuming
all dividends and distributions had been reinvested.
This information for the year ended December 31, 1999 has been audited by KPMG
LLP. You will find the auditor's report and the FFTW Funds, Inc., financial
statements in the annual report, which is available upon request. Financial
Highlights for the years prior to 1999 were audited by other auditors.
21
<PAGE>
FFTW FUNDS, INC.
FINANCIAL HIGHLIGHTS
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------- PERIOD FROM
FOR A SHARE OUTSTANDING DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 9, 1996* TO
THROUGHOUT THE PERIOD: 1999 1998 1997 DECEMBER 31, 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA
- - ------------------------------
Net asset value, beginning of
period $ 9.68 $ 9.50 $ 10.20 $ 10.00
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
- - ------------------------------
Investment income, net 0.37 ** 0.48 0.50 0.38
Net realized and unrealized
gain (loss) on investments,
financial futures contracts
and foreign currency-related
transactions (0.98) 1.21 (0.56) 0.28
-------- ------- ------- -------
Total from investment
operations (0.61) 1.69 (0.06) 0.66
-------- ------- ------- -------
LESS DISTRIBUTIONS
- - ------------------------------
From investment income, net 0.37 0.45 0.14 0.38
In excess of investment
income, net - 0.40 - -
From net realized gain on
investments, financial
futures contracts and
foreign currency-related
transactions - 0.66 0.14 0.08
From capital stock in excess
of par value - - 0.36 -
-------- ------- ------- -------
Total distributions 0.37 1.51 0.64 0.46
-------- ------- ------- -------
Net asset value, end of period $ 8.70 $ 9.68 $ 9.50 $ 10.20
======== ======= ======= =======
TOTAL RETURN (6.34%) 18.35% (0.43%) 6.66% (c)
- - ------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------------
Net assets, end of period
(000's) $103,564 $81,705 $67,653 $35,746
Ratio of operating expenses to
average net assets (a) 0.60% 0.60% 0.60% 0.60% (b)
Ratio of investment income,
net to average net
assets (a) 4.13% 4.56% 5.19% 5.73% (b)
Decrease in above expense
ratios due to waiver of
investment advisory fees 0.00% # 0.03% 0.10% 0.32% (b)
Portfolio Turnover 569% 1,049% 809% 539%
</TABLE>
- - --------------------------------------------------------------------------------
(a) Net of waivers and reimbursements.
(b) Annualized.
(c) Not annualized.
* Commencement of Operations.
** Calculation done based on average shares outstanding.
# Rounds to less than 0.01%.
22
<PAGE>
SHAREHOLDER INQUIRIES
This Prospectus contains a concise statement of information investors should
know before they invest in the Portfolio. Please retain this Prospectus for
future reference. Additional information about the Portfolio's investments is
available in the Portfolio's annual and semi-annual reports to shareholders, as
well as the Statement of Additional Information (SAI) dated May 1, 2000. The SAI
provides more detailed information about the Portfolio, including its operations
and investment policies. A current SAI is on file with the Securities and
Exchange Commission and is incorporated by reference and is legally considered a
part of this Prospectus. In the Portfolio's annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Portfolio's performance during its last fiscal year.
The Portfolio's SAI, annual and semi-annual reports are available, without
charge, upon request by contacting Investor's Capital, 600 Fifth Avenue, New
York, NY 10020, (800) 762-4848.
Information about the Portfolio (including the SAI) can be reviewed and copied
at the Commission's Public Reference Room in Washington D.C. Information on the
operation of the public reference room may be obtained by calling the Commission
at 1-202-942-8090. Reports and other information about the Portfolio are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-1012 or
by electronic request at the following e-mail address: [email protected].
DISTRIBUTED BY:
FIRST FUND DISTRIBUTORS, INC.
Fund's Investment Company Act filing number: 811-5796
23
<PAGE>
FFTW FUNDS, INC.
====================================================================
PROSPECTUS
====================================================================
MAY 1, 2000
- Mortgage LIBOR Portfolio
- Asset-Backed Portfolio
- High Yield Portfolio
- Enhanced Equity Markets Portfolio
- U.S. Treasury Portfolio
- U.S. Corporate Portfolio
- Broad Market Portfolio
- International Corporate Portfolio
- Global High Yield Portfolio
- Inflation-Indexed Portfolio
PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION (THE
"COMMISSION") IN CONNECTION WITH THE ENHANCED EQUITY MARKETS PORTFOLIO WHOSE
PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PARTICIPANTS, THIS PROSPECTUS IS
NOT REQUIRED TO BE, AND HAS NOT BEEN FILED WITH THE COMMISSION. THE COMMISSION
DOES NOT PASS UPON THE MERITS OF PARTICIPATION IN A FUND OR PORTFOLIO OR UPON
THE ADEQUACY OR ACCURACY OF A PROSPECTUS. CONSEQUENTLY, THE COMMISSION HAS NOT
REVIEWED OR APPROVED THIS PROSPECTUS FOR THE ENHANCED EQUITY MARKET PORTFOLIO.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY PORTFOLIO'S SHARES
AS AN INVESTMENT OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
CONTENTS
PAGE
Risk/Return Summary 3
Investment Objectives, Principal Investment
Strategies and Investments 3
Mortgage LIBOR Portfolio 3
Asset-Backed Portfolio 4
High Yield Portfolio 5
Enhanced Equity Portfolio 6
U.S. Treasury Portfolio 7
U.S. Corporate Portfolio 8
Broad Market Portfolio 9
International Corporate Portfolio 10
Global High Yield Portfolio 11
Inflation-Indexed Portfolio 12
Principal Investment Risks 12
Performance Information 14
Fee Table 14
Expenses Table Example 15
Fund Management 15
Shareholder Information 17
Investment Information 22
Portfolio Turnover 31
Supplemental Investment Policies 32
Shareholder Inquiries 33
<PAGE>
RISK/RETURN SUMMARY
The following is a summary of certain key information about the Portfolios,
including investment objectives, principal investment strategies and principal
investment risks. A more detailed description of the permitted investment
strategies, permitted investments and their associated risks will follow.
<TABLE>
<CAPTION>
Investment Objectives, Principal Investment
Strategies and Investments
=================================================================================================================================
MORTGAGE LIBOR PORTFOLIO
=================================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To obtain a high level of total return as may be consistent with the preservation of capital.
=================================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in high quality (rating of AA
STRATEGIES: by S&P, Aa by Moody's or a comparable rating, or higher from a nationally recognized
statistical rating organization) mortgage-backed and mortgage related
securities. The Portfolio actively utilizes hedging techniques to seek to outperform a
cash portfolio. At least 65% of the Portfolio's total assets must be invested in
mortgage-backed securities of U.S. and foreign issuers with the goal to outperform the London
InterBank Offered Rate ("LIBOR"). The performance objective of the Portfolio is to outperform
the JP Morgan 3-Month Eurodeposit Index.
MINIMUM QUALITY RATING: Thompson AVERAGE
S&P Moody's Bankwatch, PORTFOLIO
S&P: Moody's: (Short (Short Term): Inc. QUALITY:
---- -------- Term): ------------- (`Thompson"): --------
------ -------------
BBB- Baa3 A-2 P-2 B AA (Aa)
DURATION: The Portfolio's average U.S. dollar-weighted duration will not exceed plus or minus one year
around the average duration of the JP Morgan 3-Month Eurodeposit Index.
=================================================================================================================================
INVESTMENT POLICIES: For temporary defensive purposes, 100% of the Portfolio's total assets may be
invested in U.S. Government securities, cash or cash equivalent securities. These defensive
strategies may prevent the Portfolio from achieving its investment objective. The
Portfolio is "non-diversified" under the 1940 Act.
=================================================================================================================================
PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted Investment - Mortgage-Backed Securities
Strategies, Investments - Stripped Instruments
and Associated Risk for a - U.S. Government and Agency Securities
more detailed description)
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
ASSET-BACKED PORTFOLIO
=================================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of
capital.
=================================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in high quality (rating of AA by S&P, Aa by Moody's or
STRATEGIES: a comparable rating, or higher from a nationally recognized statistical rating organization)
asset-backed securities, allowing exposure to other sectors of the debt market opportunistically.
The performance objective of the Portfolio is to outperform the Lehman Brothers Asset-Backed
Securities Index.
=================================================================================================================================
MINIMUM QUALITY RATING: S&P Moody's AVERAGE
S&P: Moody's: (Short Term): (Short Thompson: PORTFOLIO QUALITY:
---- -------- ------------- Term): --------- ------------------
------
BBB- Baa3 A-2 P-2 B AA (Aa)
=================================================================================================================================
DURATION: The average U.S. dollar-weighted duration generally will not exceed plus or minus one year
plus or minus the average duration of the Lehman Brothers Asset-Backed Securities Index.
As of December 31, 1999, the duration of the Lehman Brothers Asset-Backed Securities Index
was 5 years.
=================================================================================================================================
INVESTMENT At least 65% of the Portfolio's total assets must be invested in asset-backed securities of
POLICIES: the U.S. and foreign issuers. For temporary defensive purposes, the Portfolio may invest up
to 100% of its total assets in U.S. Government securities, cash or cash equivalent securities.
These defensive strategies may prevent the Portfolio from achieving its investment objective. The
Portfolio is "non-diversified" under the 1940 Act.
=================================================================================================================================
PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Mortgage-Backed Securities
Investment Strategies, - Repurchase and Reverse Repurchase Agreements
Investments and - Stripped Instruments
Associated Risk for a - Total Return Swaps
more detailed - U.S. Government and Agency Securities
description)
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
HIGH YIELD PORTFOLIO
=================================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of capital.
=================================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in high yield debt securities. The performance objective
STRATEGIES: of the Portfolio is to outperform the Salomon Smith Barney All BB and B Rated Issues Index.
=================================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- Term): ------------- --------- ------------------
-------
CCC- Caa3 C P-3 LC-3 B
=================================================================================================================================
DURATION: The average U.S. dollar-weighted duration generally will not exceed one year around the average
duration of the Salomon Smith Barney All BB and B Rated Issues Index. As of December 31, 1999,
the duration of the Salomon Smith Barney All BB and B Rated Issues Index was 5.18 years.
=================================================================================================================================
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in high yield
securities of U.S. and foreign issuers. For temporary defensive purposes, the Portfolio may
invest up to 100% of its total assets in U.S. Government securities, cash or cash equivalent
securities. These defensive strategies may prevent the Portfolio from achieving its
investment objective. The Portfolio is "non-diversified" under the 1940 Act.
=================================================================================================================================
PRINCIPAL INVESTMENTS: - Brady Bonds
(See Permitted - Convertible Securities
Investment Strategies, - Corporate Debt Instruments
Investments and - Foreign Instruments
Associated Risk for a - Stripped Instruments
more detailed - Zero Coupon Securities
description)
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
ENHANCED EQUITY MARKETS PORTFOLIO
=================================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return that exceeds the S&P 500 Index(TM).
=================================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in high quality (rating of AA by S&P, Aa by Moody's or a
STRATEGIES: comparable rating, or higher from a nationally recognized statistical rating organization)
short duration fixed income securities and S&P 500 Index(TM) futures contracts. Where
possible, these securities will provide equity-like returns. The performance objective
of the Portfolio is to outperform the S&P 500 Index(TM).
=================================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- ------------- ------------- --------- ------------------
BBB- Baa3 A-2 P-2 B AA (Aa)
=================================================================================================================================
DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not exceed three years.
=================================================================================================================================
INVESTMENT POLICIES: The Portfolio will maintain 100% exposure to the S&P 500 Index (TM). Up to 5% of the
Portfolio's total assets may be invested in maintenance margin at any given time; the
remaining 95% the Portfolio's assets will be invested in short term instruments. For
temporary defensive purposes, 100% of the Portfolio's total assets may be invested in
U.S. Government securities, cash or cash equivalent securities. These defensive
strategies may prevent the Portfolio from achieving its investment objective. The
Portfolio is "non-diversified" under the 1940 Act.
=================================================================================================================================
PRINCIPAL INVESTMENTS: - Asset-Back Securities
(See Permitted - Bank Obligations
Investment Strategies, - Corporate Debt Instruments
Investments and - Mortgage-Backed Securities
Associated Risk for a - U.S. Government and Agency Securities
more detailed - S&P 500 Index(TM) Futures Contracts
description)
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
U.S. TREASURY PORTFOLIO
=================================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of
capital and to avoid credit quality risk.
=================================================================================================================================
PRINCIPAL INVESTMENT STRATEGIES: The Portfolio will invest primarily in U.S. Treasuries. The performance objective of
the Portfolio is to outperform the Lehman Brothers Government Securities Index.
=================================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- Term): ------------- --------- ------------------
-------
AA- Aa3 A-1 P-1 A AAA (Aaa)
=================================================================================================================================
DURATION: The average U.S. dollar-weighted duration generally will not exceed plus or minus one
year around the average duration of the Lehman Brothers Government Securities Index. As
of December 31, 1999, the duration of the Lehman Brothers Government Securities Index
was 5.12 years.
=================================================================================================================================
INVESTMENT POLICIES: At least 95% of the Portfolio's total assets must be invested in U.S. dollar-denominated
obligations issued by the U.S. Treasury and repurchase agreements collateralized by such
obligations. The Portfolio is "non-diversified" under the 1940 Act.
=================================================================================================================================
PRINCIPAL INVESTMENTS: - U.S. Government and Agency Securities
(See Permitted
Investment Strategies,
Investments and
Associated Risk for a
more detailed
description)
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
U.S. CORPORATE PORTFOLIO
=================================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of
capital.
=================================================================================================================================
PORTFOLIO DESCRIPTION: The Portfolio will invest primarily in high quality (rating of AA by S&P, Aa by Moody's
or a comparable rating, or higher from a nationally recognized statistical rating
organization) U.S. corporate obligations, with limited exposure to other debt securities.
The performance objective of the Portfolio is to outperform the Salomon Smith Barney
Corporate Bond Index.
=================================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- Term): ------------- --------- ------------------
-------
BBB- Baa3 A-2 P-2 B AA (Aa)
=================================================================================================================================
DURATION: The average U.S. dollar-weighted duration generally will not exceed plus or minus one year
around the average duration of the Salomon Smith Barney Corporate Bond Index. As of
December 31, 1999, the duration of the Salomon Smith Barney Corporate Bond index was
5.91 years.
=================================================================================================================================
INVESTMENT POLICIES: The Portfolio must invest at least 65% of its total assets in U.S.
dollar-denominated corporate debt obligations of U.S issuers. For temporary defensive
purposes, the Portfolio may invest up to 100% of its total assets in U.S. Government
securities, cash or cash equivalent securities. These defensive strategies may
prevent the Portfolio from achieving its investment objective. The Portfolio is
"non-diversified" under the 1940 Act.
=================================================================================================================================
PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Bank Obligations
Investment Strategies, - Corporate Debt Instruments
Investments and - Mortgage-Backed Securities
Associated Risk for a - U.S. Government and Agency Securities
more detailed
description)
=================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
BROAD MARKET PORTFOLIO
===============================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of capital.
===============================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in high quality (rating of AA by S&P, Aa by Moody's or a
STRATEGIES: comparable rating, or higher from a nationally recognized statistical rating organization)
fixed income securities reflective of the broad spectrum of the U.S. bond market as well as
an opportunistic allocation to non-U.S. sovereign markets. The performance objective of the
Portfolio is to outperform the Lehman Brothers Aggregate Bond Index.
===============================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- ------------- ------------- --------- ------------------
BBB- Baa3 A-2 P-2 B AA (Aa)
===============================================================================================================================
DURATION: The average U.S. dollar-weighted duration generally will not exceed plus or minus one year
around the average duration of the Lehman Brothers Aggregate Bond Index. As of December 31,
1999, the duration of the Lehman Brothers Aggregate Bond Index was 4.92 years.
===============================================================================================================================
INVESTMENT POLICIES: The Portfolio will invest at least 65% of its total assets in fixed income securities. The
allocation among markets will vary based upon the issuance of new securities and the
retirement of outstanding securities and instruments. For temporary defensive purposes, the
Portfolio may invest up to 100% of its assets in short-term U.S. Government securities, cash
or cash equivalent securities. These defensive strategies may prevent the Portfolio from
achieving its investment objective. The Investment Adviser will manage the Broad Market
Portfolio to approximate broad market allocations by purchasing and selling representative
securities in each market, but the Portfolio cannot guarantee that it will match such broad
market allocations. The current market allocation is comprised of approximately 20% in
corporate securities, 50% in U.S. Government securities and 30% in mortgage-backed and
asset-backed securities. The Portfolio will limit its investment in foreign instruments to
35% of its total assets. The Portfolio is "non-diversified" under the 1940 Act.
===============================================================================================================================
PRINCIPAL INVESTMENTS: - Asset-Backed Securities
(See Permitted - Bank Obligations
Investment Strategies, - Corporate Debt Instruments
Investments and - Mortgage-Backed Securities
Associated Risk for a - U.S. Government and Agency Securities
more detailed
description)
===============================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
INTERNATIONAL CORPORATE PORTFOLIO
===============================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of capital.
===============================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in investment grade corporate debt from worldwide bond
STRATEGIES: markets. The performance objective of the Portfolio is to outperform the Lehman Brothers
Euro Corporate Bond Index.
===============================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- Term): ------------- --------- ------------------
-------
BBB- Baa3 A-2 P-2 B AA (Aa)
===============================================================================================================================
DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not exceed one year
plus or minus the average duration of the Lehman Brothers Euro Corporate Bond Index. As
of December 31, 1999, the duration of the Lehman Brothers Euro Corporate Bond Index was
4.43 years.
===============================================================================================================================
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in investment grade European
corporate debt securities denominated in foreign currencies. The Portfolio will maintain
investments in corporate debt securities of issuers from at least three different
countries. The Portfolio may invest up to 35% of its total assets in U.S. Corporate debt
securities. At least 65% of the Portfolio's total assets will be invested in corporate
debt securities from jurisdictions outside the U.S. For temporary defensive purposes,
100% of the Portfolio's total assets may be invested in U.S. Government securities, cash
or cash equivalent securities. These defensive strategies may prevent the Portfolio from
achieving its investment objective. These defensive strategies may prevent the Portfolio
from achieving its investment objective. The Portfolio is "non-diversified" under the
1940 Act.
===============================================================================================================================
PRINCIPAL INVESTMENTS: - Corporate Debt Instruments
(See Permitted Investment - Foreign Instruments
Strategies, Investments and
Associated Risk for a more
detailed description)
===============================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
GLOBAL HIGH YIELD PORTFOLIO
===============================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of total return as may be consistent with the preservation of capital.
===============================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in high yield debt securities. High yield bonds
STRATEGIES: (also referred to as "junk bonds") have a rating of BB or lower and pay a higher yield
to compensate for its greater risk. The performance objective of the Portfolio is to
outperform the Salomon Smith Barney All BB and B Rated Issues Index.
===============================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- ------------- ------------- --------- ------------------
CCC- Caa3 C P-3 LC-3 B
===============================================================================================================================
DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not exceed one year,
plus or minus the average duration of the Salomon Smith Barney All BB and B Rated Issues
Index. As of December 31, 1999, the duration of the Salomon Smith Barney All BB and
B Rated Issues Index was 5.18 years.
===============================================================================================================================
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in high yield debt securities
from worldwide bond markets including emerging market debt securities. The Portfolio will
maintain investments in debt securities of issuers from at least three different countries
including the U.S. At least 35% of the Portfolio's total assets will be invested in debt
securities from jurisdictions outside the U.S. For temporary defensive purposes, 100% of the
Portfolio's total assets may be invested in U.S. Government securities, cash or cash
equivalent securities. These defensive strategies may prevent the Portfolio from achieving its
investment objective. The Portfolio is "non-diversified" under the 1940 Act.
===============================================================================================================================
PRINCIPAL INVESTMENTS: - Corporate Debt Instruments
(See Permitted Investment - Brady Bonds
Strategies, Investments - Foreign Instruments
and Associated Risk for a - Indexed Notes, Currency Exchange-Related Securities and Similar Securities
more detailed description)
===============================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
INFLATION-INDEXED PORTFOLIO
===============================================================================================================================
<S> <C>
INVESTMENT OBJECTIVE: To attain a high level of return in excess of inflation as may be consistent with the
preservation of capital.
===============================================================================================================================
PRINCIPAL INVESTMENT The Portfolio will invest primarily in securities with a coupon rate and/or principal amount
STRATEGIES: linked to the inflation rate from worldwide bond markets, denominated in both U.S. dollars
and foreign currencies. The performance objective of the Portfolio is to outperform the
Lehman Brothers Global Real Index.
===============================================================================================================================
MINIMUM QUALITY S&P Moody's AVERAGE
RATING: S&P: Moody's: (Short Term): (Short Term): Thompson: PORTFOLIO QUALITY:
---- -------- ------------ ------------- --------- ------------------
BBB- Baa3 A-2 P-2 B AA (Aa)
===============================================================================================================================
DURATION: The Portfolio's average U.S. dollar-weighted duration generally will not exceed one year,
plus or minus the average duration of the Lehman Brothers Global Real Index. As of December
31, 1999, the duration of the Lehman Brothers Global Real Index was 5.3 years.
===============================================================================================================================
INVESTMENT POLICIES: At least 65% of the Portfolio's total assets must be invested in inflation indexed securities.
The Portfolio is not required to invest any minimum percentage of its assets in debt
securities of issuers located outside the U.S. nor in any minimum number of countries or
currencies. For temporary defensive purposes, 100% of the Portfolio's total assets may be
invested in U.S. Government securities, cash or cash equivalent securities. These defensive
strategies may prevent the Portfolio from achieving its investment objective. The Portfolio is
"non-diversified" under the 1940 Act.
===============================================================================================================================
PRINCIPAL INVESTMENTS: - Foreign Instruments
(See Permitted Investment - Inflation-Indexed Securities
Strategies, Investments - U.S. Government and Agency Securities
and Associated Risk for a
more detailed description)
===============================================================================================================================
</TABLE>
PRINCIPAL INVESTMENT RISKS
"Risk" is the chance that you may lose money on an investment or that you will
not earn as much as you expect. The greater the risk, the greater the
possibility of losing money.
All of the Portfolios described in this Prospectus are affected by changes in
the economy, or in securities and other markets.
The possibility also exists that investment decisions of portfolio managers will
not accomplish what they are designed to achieve. No assurance can be given that
a Portfolio's investment objective will be achieved.
The Portfolios may invest in securities issued by the U.S. Government, its
agencies or sponsored enterprises. Some of these securities are backed by the
full faith and credit of the United States and others which are subject to
varying degrees of risk. Investments in the U.S. Treasury and U.S. Corporate
Portfolios are neither guaranteed nor insured by the United States
Government.
Investments in the Portfolios are subject to certain of the following risks. The
risks associated with each Portfolio depend on its investment strategy and the
types of securities it holds. The specific risks affecting each Portfolio are
indicated in the individual portfolio descriptions in this prospectus.
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
Mortgage Asset- High Enhanced U.S U.S. Broad International Global Inflation-
LIBOR Backed Yield Equity Treasury Corporate Market Corporate High Indexed
Risks: Markets Yield
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Banking industry X X
risk
- - -------------------------------------------------------------------------------------------------------------------------------
Correlation risk X X X X X X X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Credit risk X X X X X X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Currency risk X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Foreign risk X X X x
- - -------------------------------------------------------------------------------------------------------------------------------
Futures risk X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Hedging risk X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Interest rate risk X X X X X X X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Leverage risk X X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Liquidity risk X X X X X X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Market risk X X X X X X X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Non-diversification X X X X X X X X X X
risk
- - -------------------------------------------------------------------------------------------------------------------------------
Prepayment risk X X X X X X
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BANKING INDUSTRY Investing in bank obligations will expose a Portfolio to
RISK: risks associated with the banking industry such as interest
rate and credit risks.
CORRELATION RISK: Derivatives are financial instruments whose value depends
upon, or is derived from, the value of something else, such
as one or more underlying securities, indexes or currencies.
The prices of a particular derivative instrument may not
move in the same way as the underlying security or, in the
case of a hedging transaction, of the securities which are
the subject of a hedge.
CREDIT RISK: A Portfolio may be exposed to the risk that a security's
issuer or a counterparty to a contract will default or not
be able to honor a financial obligation.
CURRENCY RISK: Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. When
synthetic and cross-hedges are used, the net exposure of a
Portfolio to any one currency may be different from that of
its total assets denominated in such currency.
FOREIGN RISK: Investing in foreign securities will expose a Portfolio
to risks such as political and economic instability,
currency devaluation and high inflation rates, which may
result in Portfolio losses and volatility.
FUTURES RISK: The use of futures exposes a Portfolio to the risk that the
Investment Adviser will not be able to anticipate correctly
movements in the direction of interest rates, securities
prices, and currency markets and the imperfect correlation
between the price of futures contracts and movements in the
prices of the securities being hedged.
HEDGING RISK: Hedging exposes a Portfolio to the risk that the hedge will
lose value while the hedged investment increases in value.
INTEREST RATE: Investing in fixed-rate debt securities will expose a
RISK: Portfolio to the risk that the value of the Portfolio's
investments will decline if interest rates rise.
LEVERAGE RISK: The use of derivatives exposes a Portfolio to the risk of
leverage which may result in greater fluctuations in a
Portfolio's net asset value than would have occurred had the
Portfolio invested in the underlying security.
LIQUIDITY RISK: Certain securities may be difficult or impossible to sell at
favorable prices within the desired time frame.
MARKET RISK: The market value of a security may increase or decrease over
time. Such fluctuations can cause a security to be worth
less than the price originally paid for it or less than it
was worth at an earlier time. Market risk may affect a
single issuer, entire industry or the market as a whole.
NON-DIVERSIFICATION A non-diversified Portfolio may invest more of its assets in
RISK: the securities of fewer companies than a diversified
Portfolio. This vulnerability to factors affecting a single
investment can result in greater Portfolio losses and
volatility.
PREPAYMENT RISK: A Portfolio that invests in mortgage-backed and other
asset-backed securities is exposed to the risk that such
securities may repay principal either faster or slower than
expected.
<PAGE>
PERFORMANCE INFORMATION
All of the Portfolios have not commenced operations and therefore no performance
information is presented for any Portfolio.
FEE TABLE
This Table describes the fees and expenses that you may pay if you buy and hold
shares of a Portfolio.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
Portfolio Mortgage Asset- High Enhanced U.S U.S. Broad International Global Inflation-
Name: LIBOR Backed Yield Equity Treasury Corporate Market Corporate High Indexed
Markets Yield
- - -------------------------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Fees NONE NONE NONE NONE NONE NONE NONE NONE NONE NONE
(Fees Paid Directly
From Your
Investment)
- - -------------------------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------------
Annual Fund
Operating Expenses
(Expenses that are
Deducted From Fund
Assets)
- - -------------------------------------------------------------------------------------------------------------------------------
Management Fees 0.30% 0.10% 0.40% 0.35% 0.30% 0.10% 0.30% 0.10% 0.50% 0.40%
- - -------------------------------------------------------------------------------------------------------------------------------
Distribution Fees None None None None None None None None None None
(12b-1)
- - -------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.15% 0.15% 0.20% 0.15% 0.15% 0.15% 0.15% 0.20% 0.20% 0.15%
- - -------------------------------------------------------------------------------------------------------------------------------
Total Annual Fund
Operating Expenses 0.45% 0.25% 0.60% 0.50% 0.45% 0.25% 0.45% 0.30% 0.70% 0.55%
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Investment Adviser and Investors Capital (the "Administrator") have
voluntarily agreed to cap the Net Operating Expenses of a Portfolio (on an
annualized basis) of that Portfolio's average daily net assets as set forth
in the table below. The Investment Adviser and the Administrator will not
attempt to recover prior period waivers should expenses fall below the cap.
All operating expenses exceeding the voluntary waiver of fees will be paid by
the Investment Adviser. Under an Administration Agreement effective May 29,
1998 between the Fund and the Administrator, the Administrator provides
administrative services to the Fund for an Administrative fee and an
incentive fee. The incentive fee is paid to the administrator in the event
the Portfolio operates below its expense ratio. This fee is capped at 0.02%
of the Portfolio's average daily net assets. Such waivers can be terminated
at any time.
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
Portfolio Mortgage Asset- High Enhanced U.S U.S. Broad International Global Inflation-
Name: LIBOR Backed Yield Equity Treasury Corporate Market Corporate High Indexed
Markets Yield
- - -------------------------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Operating 0.45% 0.25% 0.60% 0.50% 0.45% 0.25% 0.45% 0.30% 0.70% 0.60%
Expense Cap
- - -------------------------------------------------------------------------------------------------------------------------------
Total Waived None None None None None None None None None None
Fees
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXPENSES TABLE EXAMPLE
The following table is intended to help you compare the cost of investing in the
Portfolios with the cost of investing in other mutual funds.
These Portfolios have not commenced investment operations, therefore only fees
for one and three years are represented.
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that each Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
- - ------------------------------------- --------------------- -------------------
PORTFOLIO NAME 1 YEAR 3 YEARS
- - ------------------------------------- --------------------- -------------------
- - ------------------------------------- --------------------- -------------------
<S> <C> <C>
Mortgage LIBOR $46 $144
- - ------------------------------------- --------------------- -------------------
Asset-Backed $26 $80
- - ------------------------------------- --------------------- -------------------
High Yield $61 $192
- - ------------------------------------- --------------------- -------------------
Enhanced Equity Markets $51 $160
- - ------------------------------------- --------------------- -------------------
U.S. Treasury $46 $144
- - ------------------------------------- --------------------- -------------------
U.S. Corporate $26 $80
- - ------------------------------------- --------------------- -------------------
Broad Market $46 $144
- - ------------------------------------- --------------------- -------------------
International Corporate $31 $97
- - ------------------------------------- --------------------- -------------------
Global High Yield $72 $224
- - ------------------------------------- --------------------- -------------------
Inflation-Indexed $56 $176
- - ------------------------------------- --------------------- -------------------
</TABLE>
FUND MANAGEMENT
BOARD OF DIRECTORS
The Board of Directors of FFTW Funds, Inc. (the "Fund"), is responsible for
the overall management and supervision of the Portfolios, which are series of
the Fund. The Fund's Directors are Stephen P. Casper, John C Head III,
Lawrence B. Krause, Andrea Redmond, Saul H. Hymans and Onder John Olcay.
Additional information about the Directors and the Fund's executive officers
may be found in the Statement of Additional Information under the heading
"Management of the Fund."
<PAGE>
INVESTMENT ADVISER
Subject to the direction and authority of the Board of Directors, Fischer
Francis Trees & Watts, Inc. ("FFTW" or the "Investment Adviser"), serves as
Investment Adviser to the Portfolios. The Investment Adviser continuously
conducts investment research and is responsible for the purchase, sale or
exchange of the Portfolios' assets. Organized in 1972, the Investment Adviser
is registered with the Securities and Exchange Commission and is a New York
corporation, that, with its affiliated companies, currently manages
approximately $30 billion in assets for numerous fixed-income portfolios. The
Investment Adviser currently advises over 125 major institutional clients
including banks, central banks, pension funds and other institutional
clients. The average size of a client relationship with the Investment
Adviser is in excess of $200 million. The Investment Adviser also serves as
the sub-adviser to three portfolios of two other open-end management
investment companies. The Investment Adviser's offices are located at 200
Park Avenue, New York, New York 10166. The Investment Adviser is directly
wholly-owned by Charter Atlantic Corporation, a New York corporation.
INVESTMENT SUB-ADVISER
Fischer Francis Trees & Watts, a corporate partnership organized under the
laws of the United Kingdom and an affiliate of the Investment Adviser, serves
as Sub-Adviser to the international Portfolios. Organized in 1989, the
Sub-Adviser is a U.S.-registered investment adviser and currently manages
approximately $7.5 billion in multi-currency fixed-income portfolios for
institutional clients. The Investment Adviser pays the Sub-Adviser monthly
from its advisory fee. The Sub-Adviser's offices are located at 3 Royal
Court, The Royal Exchange, London, EC 3V 3RA. The Sub-Adviser is directly and
indirectly wholly-owned by Charter Atlantic Corporation, a New York
corporation.
PORTFOLIO MANAGERS
FFTW uses a team approach for making the strategic and sector allocations within
each of its model portfolios. For each Portfolio, a specific portfolio manager
is responsible for portfolio implementation and compliance with
Portfolio-specific and FFTW-wide investment strategy. The portfolio manager
determines the broad risk parameters under which a Portfolio operates, but
relies on specialist investment teams for the generation of ideas and specific
investments in a Portfolio. The following groups and teams assist in the
selection of specific investments, subject to each Portfolio's investment
policies and restrictions: the Duration, Country and Foreign Exchange Strategy
Group, consisting of the Foreign Exchange, U.S. Bloc, Europe and Japan teams,
and the Sector Allocation Strategy Group, consisting of the Global Credit,
Mortgages and Emerging Markets teams.
LIAQUAT AHAMED, MANAGING DIRECTOR. Mr. Ahamed is responsible for management of
the Broad Market Portfolio. Mr. Ahamed joined FFTW in 1988 after nine years with
the World Bank, where he was in charge of all investments in non-U.S. dollar
government bond markets. Mr. Ahamed also served as an economist with senior
government officials in the Philippines, Korea, and Bangladesh. He has a B.A. in
economics from Trinity College, Cambridge University and an A.M. in economics
from Harvard University.
ADAN AKANT, MANAGING DIRECTOR. Mr. Akant is responsible for management of the
U.S. Treasury and Inflation-Indexed Portfolios. He joined FFTW in 1984 after six
years with the World Bank, where he served initially as a project financial
analyst in Europe and the Middle East area before joining the treasurer's staff
as an investment officer in 1979. Over the next five years, as a member of the
investment department, he was responsible for investment and trading of each of
the major sectors of the bank's actively managed liquidity portfolio. He was a
member of the investment strategy committee and shared responsibility for
formulating and implementing the bank's trading and investment strategy. In
1982, Mr. Akant was promoted to senior investment officer and was the division's
deputy in charge of the US dollar portfolio. At the bank, Mr. Akant developed
new measures of risk and return, various technical trading tools, and the bank's
portfolio optimization model for strategic decision-making. He was also
responsible for regularly analyzing the overall foreign exchange risk exposure
of the bank and its borrowers from both the asset and liability viewpoints. In
addition, he provided technical advice to the treasurer on the bank's
multi-currency borrowing program. At the Massachusetts Institute of Technology,
Mr. Akant earned a PhD in systems science (1977), an MS in finance and
international management (1978), an Engineer's degree (1975), and MS (1974) and
BS (1972) degrees in electrical engineering . He also taught graduate and
undergraduate level courses as a teaching assistant. Mr. Akant is a member of
the New York Academy of Sciences, IEEE, and of the Sigma XI, Tau Beta Pi, and
Eta Kappa Nu honor societies.
<PAGE>
MARK HANCOCK, PORTFOLIO MANAGER. Mr. Hancock is responsible for management of
the Mortgage LIBOR Portfolio. Mr. Hancock joined FFTW in 1998 after twelve years
at Morgan Stanley. For seven years, Mr. Hancock was with Morgan Stanley's
mortgage research department where he built the quantitative infrastructure for
derivatives trading. Subsequently, Mr. Hancock was responsible for mortgage
swaps trading and established the proprietary arbitrage trading activity. Mr.
Hancock holds an MS in Industrial Administration from Carnegie Mellon University
and a B.S. in biology from Washington and Lee University.
JEFFREY HOLTMAN, PORTFOLIO MANAGER. Mr. Holtman is responsible for management of
the Asset-Backed Portfolio and other Portfolios of FFTW Funds, Inc. Mr. Holtman
joined FFTW in May 1996 after two years with J.P. Morgan as a credit risk
analyst. At J.P. Morgan, Mr. Holtman was responsible for evaluating credit risk
and portfolio suitability analysis in the equity research group. Mr. Holtman
received a B.S. in Industrial Management and Economics from Carnegie Mellon
University (1994).
DAVID J. MARMON, MANAGING DIRECTOR. Mr. Marmon is responsible for management of
the Enhanced Equity Markets, High-Yield, Global High Yield, International
Corporate, and U.S. Corporate Portfolios. He joined FFTW in 1990 from Yamaichi
International (America) where he headed futures and options research. Mr. Marmon
was previously a financial analyst and strategist at the First Boston
Corporation, where he developed hedging programs for financial institutions and
industrial firms. Mr. Marmon has a B.A. SUMMA CUM LAUDE in economics from Alma
College and an M.A. in economics from Duke University.
SHAREHOLDER INFORMATION
PURCHASES
Portfolio shares may be purchased directly from the Portfolio, or obtained by
employing the services of an outside broker or agent. Such broker or agent may
charge a fee for its services. The minimum initial investment in any Portfolio,
if shares are purchased directly from the Portfolio, is $100,000; such minimum
may be waived at the discretion of FFTW or the distributor, First Fund
Distributors, Inc. ("First Fund"). Subsequent investments or redemptions may be
of any amount. Initial investments, if obtained through a broker or agent may be
for amounts lower than $100,000. There are no loads or 12b-1 distribution fees
imposed by the Portfolio. Shares purchased will begin accruing dividends in all
Portfolios except Mortgage LIBOR, Mortgage-Backed, and Asset-Backed on the day
Federal funds are received.
Purchases may be made on any "Business Day," meaning, any Monday through Friday,
with the exception of the holidays declared by the Federal Reserve Banks of New
York or Boston. At the present time, these holidays are: New Year's Day, Dr.
Martin Luther King's Birthday, Presidents' Day, Memorial Day, Fourth of July,
Labor Day, Columbus Day, Veterans Day, Thanksgiving, and Christmas.
WIRING INSTRUCTIONS
To: Investors Bank & Trust Company, Boston, Massachusetts.
ABA Number: 011001438
Account Name: First Fund Distributors, Inc. - Fund Purchase Account
Account Number: 933333333
Reference: (Indicate Portfolio name)
<PAGE>
TO PURCHASE SHARES
<TABLE>
<CAPTION>
- - --------------------- ----------------- --------------------- -------------------------------- ---------------------------------
PORTFOLIO NAME WHEN NET ASSET WHEN & HOW SHARES PROCEDURE FOR SAME DAY RESULT OF LATE NOTIFICATION OR
VALUE (NAV) IS MAY BE PURCHASED PURCHASES DELAY IN RECEIPT OF FUNDS
DETERMINED
- - --------------------- ----------------- --------------------- -------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
- - - MORTGAGE Last Business - Last - Purchasers must call - The Portfolio must
LIBOR Day of each Business Day Investors Capital at receive notice before 4
- - - ASSET-BACKED week or on any of each week (800) 762-4848 or (212) p.m. (wire may be received
- - - HIGH YIELD other Business or on any 332-5211 if within the after 4 p.m. ET) for
- - - GLOBAL Days approved other Business City of New York or shares to be bought at
HIGH YIELD by the Days approved Investors Bank at (800) that day's price.
Investment by the 247-0473 prior to 12:00
Adviser. Investment p.m. ET to inform the - Shares will be bought
Adviser. Portfolio of the incoming at the next business day's
wire transfer. price if wire is received
after 4:00 p.m. ET and no
- Submitted - Purchasers must notice is given.
orders must indicate which Portfolio
include a is to be purchased.
completed
account - If Federal funds are
application. received by the Portfolio
that day, the order will
- Federal be effective that day.
funds Price of shares is based
must be on the next calculation of
wired to First NAV after the order is
Fund's "Fund placed.
Purchase
Account" at
Investors Bank
& Trust Company
("Investors
Bank")
- - --------------------- ----------------- --------------------- -------------------------------- ---------------------------------
- - - ENHANCED All Business - Any - Purchasers must call - The Portfolio must
EQUITY MARKETS Days Business Day Investors Capital at receive notice before 4
- - - U.S (800) 762-4848 or (212) p.m. (wire may be received
TREASURY - Submitted 332-5211 if within the after 4 p.m. ET) for
- - - U.S. orders should City of New York or shares to be bought at
CORPORATE include a Investors Bank at (800) that day's price.
- - - BROAD completed 247-0473 prior to 12:00
MARKET account p.m. ET to inform the - Shares will be bought
- - - INTERNATIONAL application. Portfolio of the incoming at the next business day's
CORPORATE wire transfer. price if wire is received
- - - INFLATION- - Federal after 4:00 p.m. ET and no
INDEXED funds must - Purchasers must notice is given.
be wired indicate which Portfolio
to First is to be purchased.
Fund's "Fund
Purchase - If Federal funds are
Account" at received by the Portfolio
Investors Bank. that day, the order will
be effective that day.
Price of shares is based
on the next calculation
of NAV after the order is
placed.
- - --------------------- ----------------- --------------------- -------------------------------- ---------------------------------
</TABLE>
REDEMPTIONS
All Portfolio shares (fractional and full) will be redeemed upon shareholder
request. The redemption price will be the net asset value per share,
determined after the Transfer Agent receives proper notice of redemption (see
table below). Shares redeemed receive dividends declared up to, and including
the day preceding the day of the redemption payment.
Shares may be redeemed by employing the services of an outside broker or
agent or may be redeemed directly from the Portfolio. Such broker or agent
may charge a fee for its services. There are no loads or 12b-1 distribution
fees imposed by the Portfolio. No charge is imposed by the Portfolio to
redeem shares, however, a shareholder's bank may impose its own wire transfer
fee for receipt of the wire. The Fund may execute redemptions in any amount
requested by the shareholder up to the amount the shareholder has invested in
the Portfolio.
A shareholder may change its authorized agent or the account designated to
receive redemption proceeds at any time by writing to the Transfer Agent with an
appropriate signature guarantee. Further documentation may be required when
deemed appropriate by the Transfer Agent.
A telephone redemption option is made available to shareholders on the
Portfolio's Account Application. The Portfolio or the Transfer Agent may
employ procedures designed to confirm that instructions communicated by
telephone are genuine. If the Portfolio does not employ such procedures, it may
be liable for losses due to unauthorized or fraudulent instructions. The
Portfolio or the Transfer Agent may require personal identification codes and
will only wire funds through pre-existing bank account instructions. No bank
instruction changes will be accepted via telephone.
In an attempt to reduce expenses, a Portfolio may redeem shares of any
shareholder whose Portfolio account has a net asset value lower than
$100,000. A shareholder's account may be involuntarily redeemed by a
Portfolio should its account value fall below minimum investment
requirements. An involuntary redemption will not occur when drops in
investment value are the sole result of adverse market conditions. A
Portfolio will give 60 days prior written notice to shareholders whose shares
are being redeemed to allow them to purchase sufficient additional shares of
the Portfolio to avoid such
<PAGE>
redemption. The Portfolio also may redeem shares in a shareholder's account as
reimbursement for loss due to the failure of a check or wire to clear in payment
of shares purchased.
TO REDEEM SHARES
<TABLE>
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1. SHAREHOLDERS MUST PROVIDE THE FOLLOWING INFORMATION:
a. The dollar or share amount to be redeemed;
b. The account to which the redemption proceeds should be wired (this account will have been previously designated by the
shareholder on its Account Application Form);
c. The name of the shareholder; and
d. The shareholder's account number
2. SHAREHOLDERS SHOULD CALL THE TRANSFER AGENT AT (800) 247-0473 OR INVESTORS CAPITAL SERVICES AT (800) 762-4848 TO REQUEST A
REDEMPTION.
3. IN THE CASE OF FOREIGN EXCHANGES, A PORTFOLIO'S NAV MAY CHANGE WHEN SHAREHOLDERS CANNOT BUY OR SELL SHARES.
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME WHEN REDEMPTION EFFECTIVE RESULT OF LATE NOTIFICATION OF REDEMPTION
- - --------------------------- ---------------------------------------------------------- -------------------------------------------
<S> <C> <C>
If notice is received by the Transfer Agent by 4:00 p.m. If notice is received by the Transfer Agent
- - - Mortgage LIBOR ET on any Business Day, the redemption will be effective on a non-business day or after 4:00 p.m. ET
- - - Asset-Backed and payment will be made within seven calendar days, but on a Business Day, the redemption notice
- - - High Yield generally two business days following receipt of such will be deemed received as of the next
- - - Enhanced Equity notice. Price of shares is based on the next calculation Business Day.
Markets of the NAV after the order is placed.
- - - U.S Treasury
- - - U.S. Corporate
- - - Broad Market
- - - International
Corporate
- - - Global High Yield
- - - Inflation-Indexed
- - --------------------------- ---------------------------------------------------------- -------------------------------------------
</TABLE>
PRICING OF PORTFOLIO SHARES
Your price for Portfolio shares is the Portfolio's net asset value per share.
Portfolio net asset value is calculated by: (1) adding the market value of all
the Portfolio's assets, (2) subtracting all of the Portfolio's liabilities, and
then (3) dividing by the number of shares outstanding and adjusting to the
nearest cent.
1. For all Portfolios other than Mortgage LIBOR, Asset-Backed, High Yield and
Global High Yield, net asset value is calculated by the Portfolio's
Accounting Agent as of 4:00 p.m. ET on each Business Day.
2. The Mortgage LIBOR Portfolio's net asset value is calculated by the
Portfolio's Accounting Agent as of 4:00 p.m. ET on the last Business day
of each week, on any other Business Days in which the Investment Adviser
approves a purchase, and on each Business Day for which a redemption order
has been placed.
3. The Asset-Backed and High Yield Portfolios' net asset values are calculated
by the Portfolio's Accounting Agent as of 4:00 p.m. ET on the last Business
Day of each week and each month, on any other Business Days in which the
Investment Adviser approves a purchase, and on each Business Day for which
a redemption order has been placed.
4. The Global High Yield's net asset value is calculated by the Portfolio's
Accounting Agent as of 4:00 p.m. on the Last Business Day of each month, on
any other Business Days in which the Investment Adviser approves a
purchase, and on each Business Day for which a redemption order has been
placed.
<PAGE>
All Portfolio investments are valued daily at their market price, which
results in unrealized gains or losses. Readily marketable fixed-income
securities are valued on the basis of prices provided by a pricing service
when such prices are believed by the Investment Adviser to reflect the fair
value of such securities. Securities traded on an exchange are valued at
their last sales price on that exchange. Securities and other financial
instruments for which over-the-counter market quotations are available are
valued at the latest bid price (asked price for short sales). Time deposits
and repurchase agreements are generally valued at their cost plus accrued
interest. Securities for which market quotations are not readily available
will be valued in good faith by methods approved by the Board of Directors.
Securities with maturities less than 60 days are valued at amortized cost,
which approximates market value, unless this method does not represent fair
value.
DIVIDENDS
If desired, shareholders must request to receive dividends in cash (payable
on the first Business Day of the following month) on the Account Application
Form. Absent such notice, all dividends will be automatically reinvested in
additional shares on the last Business Day of each month at the share's net
asset value. In the event that a Portfolio realizes net short- or long-term
capital gains (i.e., with respect to assets held more than one year), the
Portfolio will distribute such gains by automatically reinvesting (unless a
shareholder has elected to receive cash) them in additional Portfolio shares.
Net investment income (including accrued but unpaid interest, amortization of
original issue and market discount or premium) of each Portfolio, other than,
Mortgage LIBOR, Asset-Backed, High Yield and Global High Yield Portfolios will
be declared as dividends payable daily to the respective shareholders of record
as of the close of each Business Day. The net investment income of Mortgage
LIBOR, Asset-Backed, High Yield and Global High Yield Portfolios will be
declared as dividends payable to the respective shareholders of record as of the
last Business Day of each month.
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other shareholder voting matters. Matters to be acted upon affecting a
particular Portfolio (such as approval of the investment advisory agreement with
the Investment Adviser or the submission of changes to fundamental Portfolio
investment policy) require the affirmative vote of the Portfolio shareholders.
The election of the Fund's Board of Directors and the approval of the Fund's
independent auditors are voted upon by shareholders on a Fund-wide basis. The
Fund is not required to hold annual shareholder meetings. Shareholder approval
will be sought only for certain changes in the Fund's or a Portfolio's operation
and for the election of Directors under certain circumstances. Directors may be
removed by shareholders at a special meeting. The Directors shall call a special
meeting of a Portfolio upon written request of shareholders owning at least 10%
of the Portfolio's outstanding shares.
<PAGE>
TAX CONSIDERATIONS
The following discussion is for general information only. An investor should
consult with his or her own tax adviser as to the tax consequences of an
investment in a Portfolio, including the status of distributions from each
Portfolio under applicable state or local law. For additional information
regarding tax issues pertaining to the Portfolios, see "Supplemental Tax
Considerations" in the Statement of Additional Information.
FEDERAL INCOME TAXES
Each Portfolio will distribute all of its taxable income by automatically
reinvesting such income in additional Portfolio shares and distributing those
shares to its shareholders, unless a shareholder elects on the Account
Application Form to receive cash payments for such distributions. Shareholders
receiving distributions from the Fund in the form of additional shares will be
treated for federal income tax purposes as receiving a distribution in an amount
equal to the fair market value of the additional shares on the date of such a
distribution.
Dividends a Portfolio pays from its investment company taxable income (including
interest and net short-term capital gains) will be taxable to U.S. shareholders
as ordinary income, whether received in cash or in additional Fund shares.
Designated distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) are generally taxable to
shareholders at the applicable long-term capital gains rates, regardless of how
long they have held their Portfolio shares. If a portion of a Portfolio's income
consists of dividends paid by U.S. corporations, a portion of the dividends paid
by the Portfolio may be eligible for the corporate dividends-received deduction.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by a Portfolio in October, November or December with a
record date in any such month and paid by the Portfolio during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. Each Portfolio will
inform shareholders of the amount and tax status of all amounts treated as
distributed to them not later than 60 days after the close of each calendar
year.
If a shareholder holds shares through a tax-deferred account, such as a
retirement plan, income and gains will not be taxable each year. Instead, the
taxable portion of amounts held in a tax-deferred account generally will be
subject to tax only when a distribution is made from that account.
A shareholder who sells or redeems Fund shares will generally realize a capital
gain or loss, which will be long-term or short term, generally depending upon
the shareholder's holding of the shares. An exchange of shares may be treated
as a sale.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to shareholders who:
1. fail to provide the Fund with a correct taxpayer identification number, or
2. fail to make required certifications, or
3. have been notified by the IRS that they are subject to backup withholding.
Backup withholding is not an additional tax; rather, it is a way in which the
IRS ensures it will collect taxes otherwise due. Any amount withheld may be
credited against U.S. federal income tax liability.
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting a Portfolio and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Fund or its shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.
STATE AND LOCAL TAXES
A Portfolio may be subject to state, local or foreign taxation in any
jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes. Portfolio
distributions derived from interest on obligations of the U.S. Government and
certain of its agencies, authorities and instrumentalities may be exempt from
state and local taxes in certain states. Shareholders should consult their own
tax advisers regarding possible state and local income tax exclusions for
dividend portions paid by a Portfolio, which are attributable to interest from
obligations of the U.S. Government, its agencies, authorities and
instrumentalities.
<PAGE>
DISTRIBUTION OF PORTFOLIO SHARES
Shares of each Portfolio are distributed by First Fund Distributors, Inc.
("First Fund"), pursuant to a Distribution Agreement dated as of January 1,
2000 by and among the Fund, Investors Bank & Trust Company and First Fund. No
fees are payable by the Fund pursuant to the Distribution Agreement.
Investors Bank & Trust Company pays the distribution fee while FFTW pays all
other fees and expenses related to distribution.
INVESTMENT INFORMATION
PERMITTED INVESTMENT STRATEGIES AND ASSOCIATED RISKS
PERMITTED INVESTMENT STRATEGIES, INVESTMENTS AND ASSOCIATED RISKS
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
Portfolio Mortgage Asset- High Enhanced U.S U.S. Broad International Global Inflation-
Name: LIBOR Backed Yield Equity Treasury Corporate Market Corporate High Indexed
Markets Yield
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset-Backed X X |_| X |_| X X |_| |_| |_|
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
Bank |_| |_| |_| X |_| X X |_| |_| |_|
Obligations
- - -------------------------------------------------------------------------------------------------------------------------------
Brady Bonds X |_| |_| |_| |_| X |_|
- - -------------------------------------------------------------------------------------------------------------------------------
Convertibles X |_| |_| |_| |_| |_|
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
Corporate Debt |_| |_| X X |_| X X X X |_|
Instruments
- - -------------------------------------------------------------------------------------------------------------------------------
Dollar Roll |_| |_| |_| |_| |_| |_| |_| |_| |_|
Transactions
- - -------------------------------------------------------------------------------------------------------------------------------
Duration Management |_| |_| |_| |_| |_| |_| |_| |_| |_| |_|
- - -------------------------------------------------------------------------------------------------------------------------------
Foreign Instruments X |_| |_| |_| X X X
- - -------------------------------------------------------------------------------------------------------------------------------
Hedging |_| |_| |_| |_| |_| |_| |_| |_| |_| |_|
- - -------------------------------------------------------------------------------------------------------------------------------
High-Yield Bonds X X
- - -------------------------------------------------------------------------------------------------------------------------------
Illiquid |_| |_| |_| |_| |_| |_| |_| |_| |_|
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
Indexed Notes, |_| |_| |_| |_| |_| |_| X |_|
Currency
Exchange-Related
Securities and
Similar
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
Inflation-Indexed |_| |_| |_| |_| |_| |_| |_| |_| |_| X
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
Investment |_| |_| |_| |_| |_| |_| |_| |_| |_| |_|
Companies
- - -------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed X X |_| X |_| X X |_| |_| |_|
Securities
<PAGE>
- - -------------------------------------------------------------------------------------------------------------------------------
Multi-National |_| |_| |_| |_| |_| |_| |_|
Currency Unit
Securities or
More Than
One Currency
Denomination
- - -------------------------------------------------------------------------------------------------------------------------------
Municipal |_| |_| |_| |_| |_| |_| |_|
Instruments
- - -------------------------------------------------------------------------------------------------------------------------------
Repurchase and |_| X |_| |_| |_| |_| |_| |_| |_| |_|
Reverse Repurchase
Agreements
- - -------------------------------------------------------------------------------------------------------------------------------
Short Sales |_| |_| |_| |_| |_| |_| |_| |_|
Transactions
- - -------------------------------------------------------------------------------------------------------------------------------
Stripped X X X |_| |_| |_| |_| |_| |_| |_|
Instruments
- - -------------------------------------------------------------------------------------------------------------------------------
TBA Transactions |_| |_| |_| |_| |_| |_| |_| |_| |_|
- - -------------------------------------------------------------------------------------------------------------------------------
Total Return |_| X |_| |_| |_| |_| |_| |_| |_|
Swaps
- - -------------------------------------------------------------------------------------------------------------------------------
U.S. Government X X |_| X X X X |_| X
and Agency
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
Warrants |_| |_| |_| |_| |_| |_|
- - -------------------------------------------------------------------------------------------------------------------------------
When Issued |_| |_| |_| |_| |_| |_| |_| |_| |_| |_|
& Forward Commitment
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
Zero Coupon |_| |_| X |_| |_| |_|
Securities
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
X Principal Investments
|_| Other Investments
ASSET-BACKED SECURITIES
Asset-backed securities are secured by or backed by assets other than
mortgage-related assets, such as automobile and credit card receivables. These
securities are sponsored by such institutions as finance companies, finance
subsidiaries of industrial companies and investment banks. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities, however, the underlying assets are not first lien mortgage loans or
interests, but include assets such as:
a. motor vehicle installment sale contracts,
b. other installment sale contracts,
c. leases of various types of real and personal property, and
d. receivables from revolving credit (credit card) agreements.
RISKS: The principal amount of asset-backed securities is generally subject
to partial or total prepayment risk. If an asset-backed security is
purchased at a premium or discount to par, a prepayment rate that is faster
than expected will reduce or increase, respectively, the yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect on yield to maturity. These securities may not have any security
interest in the underlying assets, and recoveries on the repossessed
collateral may not, in some cases, be available to support payments on
these securities.
BANK OBLIGATIONS
Bank obligations are bank issued securities. These instruments include, but are
not limited to:
<TABLE>
<S> <C> <C> <C> <C> <C>
a. Time Deposits, e. Deposit Notes, h. Variable Rate Notes,
b. Certificates of Deposit, f. Eurodollar Time deposits, i. Loan Participations,
c. Bankers' Acceptances, g. Eurodollar Certificates of j. Variable Amount Master Demand Notes,
d. Bank Notes, Deposit, k. Yankee CDs, and
l. Custodial Receipts
</TABLE>
<PAGE>
RISKS: Investing in bank obligations exposes a Portfolio to risks
associated with the banking industry such as interest rate and credit
risks.
BRADY BONDS
Brady Bonds are debt securities, issued or guaranteed by foreign governments in
exchange for existing external commercial bank indebtedness. To date, over $109
billion (face amount) of Brady Bonds have been issued by the governments of
seventeen countries, the largest proportion having been issued by Argentina,
Brazil, Mexico and Venezuela. Brady Bonds are either collateralized or
uncollateralized, issued in various currencies (primarily the U.S. dollar), and
are actively traded in the over-the-counter secondary market.
A Portfolio may invest in either collateralized or uncollateralized Brady Bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
RISKS: Brady Bonds are generally issued by countries with developing
capital markets or unstable governments and as such, are considered to be
among the more risky international investments.
CONVERTIBLE SECURITIES
Convertible bonds or shares of convertible preferred stock are securities that
may be converted into, or exchanged for, underlying shares of common stock,
either at a stated price or stated rate. Convertible securities have general
characteristics similar to both fixed income and equity securities.
RISKS: Typically, convertible securities are callable by the company, which
may, in effect, force conversion before the holder would otherwise choose.
If the issuer chooses to convert the security, this action could have an
adverse effect on a Portfolio's ability to achieve its objectives.
CORPORATE DEBT INSTRUMENTS
Corporate bonds are debt instruments issued by private corporations. As
creditors, bondholders have a prior legal claim over common and preferred
stockholders of the corporation as to both income and assets for the
principal and interest due to the bondholder. A Portfolio purchases corporate
bonds subject to quality restraints. Commercial paper, notes and other
obligations of U.S. and foreign corporate issuers (including medium-term and
variable rate notes) must meet the Portfolio's credit quality standards. A
Portfolio may retain a downgraded corporate debt security if the Investment
Adviser determines retention of such security to be in the Portfolio's best
interests.
RISKS: Investing in corporate debt securities subjects a Portfolio to
interest rate changes and credit risks.
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions consist of the sale of mortgage-backed securities, with
a commitment to purchase similar, but not identical securities at a future date,
and at the same price. Portfolios will maintain a segregated custodial account
for dollar roll transactions. The segregated accounts may contain cash, U.S.
Government Securities or other liquid, unencumbered securities having an
aggregate value at least equal to the amount of such commitments to repurchase
the securities under the dollar roll transaction (including accrued interest).
RISKS: Should the broker-dealer to whom a Portfolio sells an underlying
security of a dollar roll transaction become insolvent, the Portfolio's
right to purchase or repurchase the security may be restricted, or the
price of the security may change adversely over the term of the dollar roll
transaction.
DURATION MANAGEMENT
Duration measures a bond's price volatility, incorporating the following
factors:
a. the bond's yield,
b. coupon interest payments,
<PAGE>
c. final maturity,
d. call features, and
e. prepayment assumptions.
Duration measures the expected life of a debt security on a present value basis.
It incorporates the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled (or in the case
of a callable bond, expected to be received) and weighs them by the present
values of the cash to be received at each future point in time. For any debt
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, for the same maturity, the
lower the stated or coupon rate of interest of a debt security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a debt security, the shorter the duration of the security.
Futures, options and options on futures have durations closely related to the
duration of the securities that are underlying them. Holding long futures or
call options will lengthen a Portfolio's duration by approximately the same
amount that holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions and have
the effect of reducing duration by approximately the same amount that selling
an equivalent amount of the underlying securities would. The market price of
a bond with a duration of two years would be expected to decline 2% if
interest rates rose 1%. If a bond has an effective duration of three years, a
1% increase in general interest rates would be expected to cause the bond's
value to decline by about 3%.
RISKS: Changes in weighted average duration of a Portfolio's holdings are not
likely to be so large as to cause them to fall outside the ranges specified
above. There is no assurance that deliberate changes in a Portfolio's weighted
average duration will enhance its return relative to more static duration
policies or Portfolio structures. In addition, it may detract from its relative
return.
FOREIGN INSTRUMENTS
a. FOREIGN SECURITIES
Foreign securities are securities denominated in currencies other than the U.S.
dollar and may be denominated in any single currency or multi-currency units.
The Investment Adviser and the Sub-Adviser will adjust exposure of a Portfolio
to different currencies based on their perception of the most favorable markets
and issuers. In allocating assets among multiple markets for certain Portfolios,
the Investment Adviser and the Sub-Adviser will assess the relative yield and
anticipated direction of interest rates in particular markets, general market
and economic conditions and the relationship of currencies of various countries
to each other. In their evaluations, the Investment Adviser and the Sub-Adviser
will use internal financial, economic and credit analysis resources as well as
information obtained from external sources.
The global and international Portfolios will invest primarily in securities
denominated in the currencies of the United States, Japan, Canada, Western
European nations, New Zealand and Australia, as well as securities denominated
in the Euro and the European Currency Unit. Further, it is anticipated that such
securities will be issued primarily by governmental and private entities located
in such countries and by supranational entities. Portfolios will only invest in
countries considered to have stable governments, based on the Investment
Adviser's analysis of social, political and economic factors.
b. FOREIGN GOVERNMENT, INTERNATIONAL AND SUPRANATIONAL AGENCY SECURITIES
These securities include debt obligations issued or guaranteed by a foreign
government or its subdivisions, agencies and instrumentalities, international
agencies and supranational entities.
RISKS: Generally, foreign financial markets have substantially less volume
than the U.S. market. Securities of many foreign companies are less liquid,
and their prices are more volatile than securities of comparable domestic
companies. Certain Portfolios may invest portions of their assets in
securities denominated in foreign currencies. These investments carry risks
of fluctuations of exchange rates relative to the U.S. dollar. Securities
issued by foreign entities (governments, corporations etc.) may involve
risks not associated with U.S. investments, including expropriation of
assets, taxation, political or social instability and low financial
reporting standards--all of which may cause declines in investment returns.
c. EMERGING MARKETS SECURITIES
Emerging markets securities are foreign securities issued from countries which
are considered to be "emerging" or "developing" by the Morgan Stanley Composite
Index (MSCI) or by the World Bank. Such emerging markets include all markets
other than Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong,
<PAGE>
Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland, the United Kingdom and the United States.
RISKS: The risks of investing in foreign securities may be intensified when
the issuers are domiciled or doing substantial business in emerging market
countries or countries with developing capital markets. Security prices in
emerging markets can be significantly more volatile than those in more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. Emerging market
countries may have:
<TABLE>
<S> <C> <C> <C>
a. Relatively unstable governments; d. restrictions on foreign ownership;
b. present the risk of sudden adverse government action; e. prohibitions of repatriation of assets; or
c. nationalization of businesses; f. less protection of property rights than more
developed countries
</TABLE>
The economies of countries with emerging markets may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt
burdens or inflation rates. Local securities markets may trade a small
number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial
holdings difficult or impossible at times. Transaction settlement
procedures may be less reliable in emerging markets than in developed
markets. Securities of issuers located in countries with emerging markets
may have limited marketability and may be subject to more abrupt or erratic
price movements.
HEDGING
Hedging techniques are used to offset certain investment risks. Such risks
include: changes in interest rates, changes in foreign currency exchange rates
and changes in securities and commodity prices. Hedging techniques are commonly
used to minimize a given instrument's risks of future gain or loss. Hedging
techniques include:
<TABLE>
<S> <C> <C> <C>
a. engaging in swaps; d. purchasing and selling futures contracts; and
b. purchasing and selling caps, floors and collars; e. purchasing and selling options.
c. purchasing or selling forward exchange contracts;
</TABLE>
All hedging instruments described below constitute commitments by a
Portfolio and therefore require the Portfolio to segregate cash (in any
applicable currency), U.S. Government securities or other liquid and
unencumbered securities (in any applicable currency) equal to the amount of
the Portfolio's obligations in a separate custody account.
When a Portfolio purchases a futures or forward currency contract for
non-hedging purposes, the sum of the segregated assets plus the amount of
initial and variation margin held in the broker's account, if applicable, must
equal the market value of the futures or forward currency contract.
When a Portfolio sells a futures or forward currency contract for non-hedging
purposes, the Portfolio will have the contractual right to acquire:
1. the securities,
2. the foreign currency subject to the futures, or
3. the forward currency contract.
The portfolio will segregate assets, in an amount at least equal to the
market value of the securities or foreign currency underlying the futures or
forward currency contract.
Should the market value of the contract move adversely to the Portfolio, or if
the value of the securities in the segregated account declines, the Portfolio
will be required to deposit additional cash or securities in the segregated
account at a time when it may be disadvantageous to do so.
A Portfolio will not enter into any swaps, caps or floors unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either A or A-1 or better by S&P or A or P-1 or better by Moody's. If
unrated, it must be determined to be of comparable quality by the Investment
Adviser.
a. SWAPS
Swaps are commonly used for hedging purposes. Hedging involving mortgage and
interest rate swaps may enhance total return. Interest rate swaps involve a
Portfolio's exchange with another party of their respective commitments to pay
or
<PAGE>
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps, both represent
commitments to pay and receive funds. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
b. CAPS, FLOORS AND COLLARS
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar incorporates a cap and
a floor in one transaction as described above.
c. FORWARD FOREIGN EXCHANGE CONTRACTS
A forward foreign exchange contract is the purchase or sale of a foreign
currency, on a specified date, at an exchange rate established before the
currency's payment and delivery to hedge the currency exchange risk associated
with its assets or obligations denominated in foreign currencies. Synthetic
hedging is a technique utilizing forward foreign exchange contracts that is
frequently employed by many of the Portfolios. It entails entering into a
forward contract to sell a currency, the changes in value of which are generally
considered to be linked to a currency or currencies in which some or all of the
Portfolio's securities are or are expected to be denominated, and buying U.S.
dollars. There is a risk that the perceived linkage between various currencies
may not be present during the particular time that a Portfolio is engaging in
synthetic hedging. A Portfolio may also cross-hedge currencies by entering into
forward contracts to sell one or more currencies that are expected to decline in
value relative to other currencies to which the Portfolio has or expects to have
exposure.
d. FUTURES CONTRACTS
A futures contract is an agreement to buy or sell a specific amount of a
financial instrument at a particular price on a specified date. The futures
contract obligates the buyer to purchase the underlying commodity and the seller
to sell it. Losses from investing in futures transactions that are unhedged or
uncovered are potentially unlimited. Substantially all futures contracts are
closed out before settlement date or called for cash settlement. A futures
contract is closed out by buying or selling an identical offsetting futures
contract that cancels the original contract to make or take delivery. At times,
the ordinary spreads between values in the cash and futures markets, due to
differences in the character of these markets, are subject to distortions. The
possibility of such distortions means that a correct forecast of general market,
foreign exchange rate or interest rate trends may not produce the Portfolio's
intended results. Investors should note that the Enhanced Equity Markets
Portfolio may, unlike the other Fund Portfolios, invest more than 5% of its
total net assets in futures contracts and will utilize futures contracts for
purposes other than bona fide hedging
e. OPTIONS CONTRACTS
An option is a contractual right, but not an obligation, to buy (call) or sell
(put) property that is guaranteed in exchange for an agreed upon sum. If the
right is not exercised within a specified period of time, the option expires and
the option buyer forfeits the amount paid. An option may be a contract that
bases its value on the performance of an underlying bond. When a Portfolio
writes a call option, it gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open. A put option gives the purchaser, in return for
a premium, the right, for a specified period or time, to sell the securities or
currency subject to the option to the writer of the put at the specified
exercise price. The writer of the put option, in return for the premium, has the
obligation, upon exercise of the option, to acquire the securities or currency
underlying the option at the exercise price. A Portfolio might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
RISKS: Hedging involves risks of imperfect correlation in price movements
of the hedge and movements in the price of the hedged security. If interest
or currency exchange rates do not move in the direction of the hedge, a
Portfolio will be in a worse position than if hedging had not been
employed. As a result, it will lose all or part of the benefit of the
favorable rate movement due to the cost of the hedge or offsetting
positions. Hedging transactions not entered into on a U.S. or foreign
exchange may subject a Portfolio to exposure to the credit risk of its
counterparty. Futures and options transactions entail special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related Portfolio position
could create the possibility that losses will be greater than gains in the
value of the Portfolio's position. Other risks include the risk that a
Portfolio could not close out a futures or options position when it would
be most advantageous to do so.
<PAGE>
HIGH YIELD BONDS
High yield bonds (also known as junk bonds) are issued by corporations who
either do not have long track records of sales and earnings, or by those who
possess questionable credit strength.
RISKS: The risk of default is higher on high yield bonds than it would be
on investment grade bonds.
ILLIQUID SECURITIES
Illiquid securities cannot be sold or disposed of in the ordinary course of
business within seven days for approximately the value at which a Portfolio has
valued the securities. These include:
1. securities with legal or contractual restrictions on resale,
2. time deposits, repurchase agreements and dollar roll transactions having
maturities longer than seven days, and
3. securities not having readily available market quotations.
Although the Portfolios are allowed to invest up to 15% of the value of their
net assets in illiquid assets, it is not expected that any Portfolio will invest
a significant portion of its assets in illiquid securities. The Investment
Adviser monitors the liquidity of such restricted securities under the
supervision of the Board of Directors.
A Portfolio may purchase securities not registered under the Securities Act of
1933 as amended (the "1933 Act"), but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act. A Portfolio
may also invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the 1933 Act
(Section 4(2) paper). Section 4(2) paper is restricted as to disposition under
the federal securities laws, and generally is sold to institutional investors.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
is normally resold to other institutional investors through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not determined
to be liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The Investment Adviser will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors.
RISKS: Investing in illiquid securities presents the potential risks of
tying up a Portfolio's assets at a time when liquidating assets may be
necessary to meet debts and obligations.
INDEXED NOTES, CURRENCY EXCHANGE-RELATED SECURITIES AND SIMILAR SECURITIES
These securities are notes, the principal amount of which and/or the rate of
interest payable is determined by reference to an index. This index may be
determined by the rate of exchange between the specified currency for the note
and one or more other currencies or composite currencies.
RISKS: Foreign currency markets can be highly volatile and are subject to
sharp price fluctuations. A high degree of leverage is typical for foreign
currency instruments in which a Portfolio may invest.
INFLATION-INDEXED SECURITIES
Inflation-indexed securities are linked to the inflation rate from worldwide
bond markets such as the U.S. Treasury Department's "inflation-protection"
issues. The initial issues are ten year notes which are issued quarterly. Other
maturities will be sold at a later date. The principal is adjusted for inflation
(payable at maturity) and the semi-annual interest payments equal a fixed
percentage of the inflation adjusted principal amount. The inflation adjustments
are based upon the Consumer Price Index for Urban Consumers. These securities
may be eligible for coupon stripping under the U.S. Treasury program. In
addition to the U.S. Treasury's issues, inflation-indexed securities include
inflation-indexed securities from other countries such as Australia, Canada, New
Zealand, Sweden and the United Kingdom.
RISKS: If the periodic adjustment rate measuring inflation falls, the
principal value of inflation-indexed bonds will be adjusted downward, and
consequently the interest payable on these securities (calculated with
respect to a smaller principal amount) will be reduced. Repayment of the
original bond principal upon maturity (as adjusted for inflation) is
guaranteed in the case of U.S. Treasury inflation-indexed bonds, even
during a period of deflation. The current market value of the bonds is not
guaranteed, and will fluctuate. The Portfolios also may invest in other
inflation related bonds that may or may not provide a similar guarantee. If
a guarantee of principal is not provided, the adjusted principal value of
the bond repaid at maturity may be less than the original principal.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is limited trading history for these securities, and there
can be no assurance that a liquid market in these instruments will develop,
although one is expected to continue to evolve. Lack of a liquid market may
impose the risk of higher transaction
<PAGE>
costs and the possibility that a Portfolio may be forced to liquidate
positions when it would not be advantageous to do so. Finally, there can be
no assurance that the Consumer Price Index for Urban Consumers will
accurately measure the real rate of inflation in the price of goods and
services.
INVESTMENT COMPANIES
An investment company is an investment vehicle, which, for a management fee,
invests the pooled funds of investors in securities appropriate for its
investment objectives. Two basic types of investment companies exist:
1. Open end funds: these funds have a floating number of outstanding shares
and will sell or redeem shares at their current net asset value,
2. Closed end funds: these funds have a fixed number of outstanding shares
that are traded on an exchange.
The Portfolios will not invest in any funds classified as "load funds."
The acquiring company may not purchase or otherwise acquire securities in the
acquired company (if no-load) if, immediately after the acquisition, the
acquiring company and any company controlled by it would own in the aggregate
more than 3% of the total outstanding voting stock of the acquired company, or
would not otherwise comply with any requirements under the Investment Company
Act of 1940.
A Portfolio may invest in another Portfolio within the FFTW Funds, Inc. family.
This is commonly referred to as cross-portfolio investing. Should such
cross-portfolio investing occur, investors will not be double-charged advisory
fees. The Portfolio in which it is directly invested will only charge investors
an advisory fee.
RISKS: Generally, risks posed by a particular fund will mirror those posed
by the underlying securities. A money market fund has the highest safety of
principal, whereas bond funds are vulnerable to interest rate movements.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities representing ownership interests in,
or debt obligations secured entirely or primarily by, "pools" of residential or
commercial mortgage loans or other mortgage-backed securities. Mortgage-backed
securities may take a variety of forms, the most common being:
1. Mortgage-pass through securities issued by
a. the Government National Mortgage Association (Ginnie Mae),
b. the Federal National Mortgage Association (Fannie Mae),
c. the Federal Home Loan Mortgage Corporation (Freddie Mac),
d. commercial banks, savings and loan associations, mortgage banks or by
issuers that are affiliates of or sponsored by such entities,
2. Collateralized mortgage obligations (CMOs) which are debt obligations
collateralized by such assets, and
3. Commercial mortgage-backed securities.
The Investment Adviser expects that new types of mortgage-backed securities may
be created offering asset pass-through and asset-collateralized investments in
addition to those described above by governmental, government-related and
private entities. As new types of mortgage-related securities are developed and
offered to investors, the Investment Adviser will consider whether it would be
appropriate for a Portfolio to make investments in them.
CMOs are derivatives collateralized by mortgage pass-through securities. Cash
flows from mortgage pass-through securities are allocated to various tranches in
a predetermined, specified order. Each tranche has a stated maturity - the
latest date by which the tranche can be completely repaid, assuming no
prepayments - and has an average life - the average of the time to receipt of a
principal payment weighted by the size of the principal payment. The average
life is typically used as a proxy for maturity because the debt is amortized,
rather than being paid off entirely at maturity.
RISKS: A Portfolio may invest in mortgage-backed and other asset-backed
securities carrying the risk of a faster or slower than expected prepayment
of principal which may affect the duration and return of the security.
Portfolio returns will be influenced by changes in interest rates. Changes
in market yields affect a Portfolio's asset value since Portfolio debt will
generally increase in value when interest rates fall and decrease when
interest rates rise. Compared to debt that cannot be prepaid,
mortgage-backed investments are less likely to increase in value during
periods of declining interest rates and have a higher risk of decline in
value during periods of rising interest rates. Thus, interest rates have
an inverse relationship with corresponding market values. Prices of
shorter-term securities generally fluctuate less in response to interest
rate changes than do longer-term securities.
<PAGE>
MULTI-NATIONAL CURRENCY UNIT SECURITIES OR MORE THAN ONE CURRENCY DENOMINATION
Multi-national currency unit securities are tied to currencies of more than one
nation. This includes the European Currency Unit--a "basket" consisting of
specified currencies of the member states of the European Community (a Western
European economic cooperative organization). These securities include securities
denominated in the currency of one nation, although it is issued by a
governmental entity, corporation or financial institution of another nation.
RISKS: Investments involving multi-national currency units are subject to
changes in currency exchange rates which may cause the value of such
invested securities to decrease relative to the U.S. dollar.
MUNICIPAL INSTRUMENTS
Municipal instruments are debt obligations issued by a state or local government
entity. The instruments may support general governmental needs or special
governmental projects. It is not anticipated that such instruments will ever
represent a significant portion of any Portfolio's assets.
RISKS: Investments in municipal instruments are subject to the
municipality's ability to make timely payment. Municipal instruments may
also be subject to bankruptcy protection should the municipality file for
such protection.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Under a repurchase agreement, a bank or securities firm (a dealer in U.S.
Government Securities reporting to the Federal Reserve Bank of New York) or the
Fund's Custodian agrees to sell U.S. Government Securities to a Portfolio and
repurchase such securities from the Portfolio for an agreed price at a later
date. Under a reverse repurchase agreement, a primary or reporting dealer in
U.S. Government Securities purchases U.S. Government Securities from a Portfolio
and the Portfolio agrees to repurchase the securities for an agreed price at a
later date.
Each Portfolio will maintain a segregated custodial account for its reverse
repurchase agreements. Until repayment is made, the segregated accounts may
contain cash, U.S. Government Securities or other liquid, unencumbered
securities having an aggregate value at least equal to the amount of such
commitments to repurchase (including accrued interest). Repurchase and reverse
repurchase agreements will generally be restricted to those maturing within
seven days.
RISKS: If the other party to a repurchase and/or reverse repurchase
agreement becomes subject to a bankruptcy or other insolvency proceeding,
or fails to satisfy its obligations thereunder, delays may result in
recovering cash or the securities sold, or losses may occur as to all or
part of the income, proceeds or rights in the security.
SHORT SALES
Short sales are transactions in which a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. Short
selling provides the Investment Adviser with flexibility to reduce certain risks
of the Portfolio's holdings and increase the Portfolio's total return. To the
extent that the Portfolio has sold securities short, it will maintain a daily
segregated account, containing cash, U.S. Government securities or other liquid
and unencumbered securities, at such a level that (a) the amount deposited in
the account plus the amount deposited with the broker as collateral will equal
the current value of the security sold short and (b) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short.
RISKS: A short sale is generally used to take advantage of an anticipated
decline in price or to protect a profit. A Portfolio will incur loss as a
result of a short sale if the price of the security increases between the
date of the short sale and the date on which Portfolio replaces the
borrowed money. The amount of any loss will be increased by the amount of
any premium or amounts in lieu of interest the Portfolio may be required to
pay in connection with a short sale. Without the purchase of an option, the
potential loss from a short sale is unlimited.
STRIPPED INSTRUMENTS
Stripped instruments are bonds, reduced to its two components: its rights to
receive periodic interest payments (IOs) and rights to receive principal
repayments (POs). Each component is then sold separately. Such instruments
include:
a. Municipal Bond Strips
<PAGE>
b. Treasury Strips
c. Stripped Mortgage-Backed Securities
RISKS: POs do not pay interest, its return is solely based on payment of
principal at maturity. Both POs and IOs tend to be subject to greater
interim market value fluctuations in response to changes in interest rates.
Stripped Mortgage-Backed Securities IOs run the risk of unanticipated
prepayment which will decrease the instrument's overall return.
TBA (TO BE ANNOUNCED) TRANSACTIONS
In a TBA transaction, the type of mortgage-backed securities to be delivered is
specified at the time of trade, but the actual pool numbers of the securities to
be delivered are not known at the time of the trade. For example, in a TBA
transaction, an investor could purchase $1 million 30 year mortgage-backed
securities issued by the Federal National Mortgage Association and receive up to
three pools on the settlement date. The pool numbers to be delivered at
settlement will be announced shortly before settlement takes place. Agency
pass-through mortgage-backed securities are usually issued on a TBA basis. Each
Portfolio will maintain a segregated custodial account containing cash, U.S.
Government securities or other liquid and unencumbered securities having a value
at least equal to the aggregate amount of a Portfolio's TBA transactions.
RISKS: The value of the security on the date of delivery may be less than
its purchase price, presenting a possible loss of asset value.
TOTAL RETURN SWAPS
A total return swap is an exchange of one security for another. Unlike a hedge
swap, a total return swap is solely entered into as a derivative investment to
enhance total return.
RISKS: A total return swap may result in a Portfolio obtaining an
instrument, which for some reason, does not perform as well as the original
swap instrument. Additionally, potential risks of default also exist on the
part of the counterparty.
U.S. GOVERNMENT AND AGENCY SECURITIES AND GOVERNMENT-SPONSORED
ENTERPRISES/FEDERAL AGENCIES
U.S. Government and agency securities are issued by or guaranteed as to
principal and interest by the U.S. Government, its agencies or instrumentalities
and supported by the full faith and credit of the United States. A Portfolio may
also invest in other securities which may be issued by a U.S.
Government-sponsored enterprise or federal agency, and supported either by its
ability to borrow from the U.S. Treasury or by its own credit standing. Such
securities do not constitute direct obligations of the United States but are
issued, in general, under the authority of an Act of Congress. The universe of
eligible securities in these categories include those sponsored by:
a. U.S. Treasury Department,
b. Farmer's Home Administration,
c. Federal Home Loan Mortgage Corporation,
d. Federal National Mortgage Association,
e. Student Loan Marketing Association, and
f. Government National Mortgage Association.
RISKS: Investing in securities backed by the full faith and credit of the
U.S. Government are guaranteed only as to interest rate and face value at
maturity, not its current market price.
WARRANTS
A warrant is a corporate-issued option that entitles the holder to buy a
proportionate amount of common stock at a specified price. Warrants are freely
transferable and can be traded on the major exchanges.
RISKS: Warrants retain their value only so long as the stock retains its
value. Typically, when the value of the stock drops, the value of the
warrant drops.
WHEN ISSUED AND FORWARD COMMITMENT SECURITIES
<PAGE>
The purchase of a when issued or forward commitment security will be recorded on
the date a Portfolio enters into the commitment. The value of the security will
be reflected in the calculation of the Portfolio's net asset value. The value of
the security on delivery date may be more or less than its purchase price.
Generally, no interest accrues to a Portfolio until settlement. Each Portfolio
will maintain a segregated custodial account containing cash, U.S. Government
securities or other liquid and unencumbered securities having a value at least
equal to the aggregate amount of a Portfolio's when issued and forward
commitments transactions.
RISKS: The value of the security on the date of delivery may be less than
its purchase price, presenting a possible loss of asset value.
ZERO COUPON SECURITIES
Zero coupon securities are sold at a deep discount from their face value. Such
securities make no periodic interest payments, however, the buyer receives a
rate of return by the gradual appreciation of the security, until it is redeemed
at face value on a specified maturity date.
RISKS: Zero coupon securities do not pay interest until maturity and tend
to be subject to greater interim market value fluctuations in response to
interest rate changes rather than interest paying securities of similar
maturities. Credit risk is generally greater for these investments that are
required to pay interest only at maturity rather than at intervals during
the life of the investment.
PORTFOLIO TURNOVER
Portfolio turnover rates are believed to be higher than the turnover experienced
by most fixed income funds, due to the Investment Adviser's active management of
duration. This could, in turn, lead to higher turnover costs. High portfolio
turnover may involve greater brokerage commissions and transactions costs which
will be paid by a Portfolio. In addition, high turnover rates may result in
increased short-term capital gains.
SUPPLEMENTAL INVESTMENT POLICIES
ALL PORTFOLIOS
Each Portfolio may invest more than 5% of its net assets in futures margins
and/or premiums on options only if it is being used for bona fide hedging
purposes.
U.S. TREASURY PORTFOLIO
The Portfolio may invest up to 5% of its total assets in high quality (rating of
AA by S&P, Aa by Moody's or a comparable rating, or higher from a nationally
recognized statistical rating organization) fixed income securities.
U.S. CORPORATE PORTFOLIO
The Portfolio may invest up to 35% of its total assets in non-dollar-denominated
corporate debt obligations of foreign issuers, or other U.S. dollar-denominated
non-corporate debt obligations.
BROAD MARKET PORTFOLIO
The Portfolio has limited exposure to non-U.S. dollar denominated securities.
<PAGE>
SHAREHOLDER INQUIRIES
This Prospectus contains a concise statement of information investors should
know before they invest in a Portfolio. Please retain this Prospectus for future
reference. Additional information about a Portfolio's investments is available
in such Portfolio's annual and semi-annual reports to shareholders, as well
as the Statement of Additional Information (SAI) dated May 1, 2000. The SAI
provides more detailed information about the Portfolios, including their
operations and investment policies. A current SAI is on file with the Securities
and Exchange Commission and is incorporated by reference and is legally
considered a part of this Prospectus. In each Portfolio's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Portfolio's performance during its last fiscal year.
A Portfolio's SAI, annual and semi-annual reports are available, without charge,
upon request by contacting Investors Capital, 600 Fifth Avenue, New York, NY
10020, (800) 762-4848.
Information about a Portfolio (including the SAI) can be reviewed and copied at
the Commission's Public Reference Room in Washington D.C. Information on the
operation of the public reference room may be obtained by calling the Commission
at 1-202-942-8090. Reports and other information about the Portfolios are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington D.C. 20549-0102 or by
electronic request at the following e-mail address: [email protected].
DISTRIBUTED BY:
FIRST FUND DISTRIBUTORS, INC.
Fund's Investment Company Act filing number: 811-5796
<PAGE>
FFTW FUNDS, INC.
- - --------------------------------------------------------------------------------
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NEW YORK 10166 (212) 681-3000
Distributed by:
First Fund Distributors, Inc. ("First Fund")
4455 East Camelback Road
Suite 261E
Phoenix, AZ 85018
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
May 1, 2000
FFTW Funds, Inc. (the "FUND") is a no-load, open-end management investment
company managed by Fischer Francis Trees & Watts, Inc. (the "INVESTMENT
ADVISER"). The Fund currently consists of nineteen portfolios (each a
"PORTFOLIO") as described below:
PROSPECTUS PROSPECTUS
- - ------------------------------------- ----------------------------------
Mortgage LIBOR U.S. Short-Term
Asset-Backed Limited Duration
High Yield Global Tactical Exposure
Enhanced Equity Market Worldwide
U.S. Treasury Worldwide-Hedged
U.S. Corporate International
Broad Market Emerging Markets
International Corporate Inflation-Indexed Hedged
Global High Yield Mortgage-Backed
Inflation-Indexed
This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the Portfolios' Prospectuses dated May 1, 2000.
Financial Statements are incorporated by reference into this SAI from the Fund's
Annual Report. You can get a free copy of a Prospectus or the Fund's most recent
annual or semi-annual report by contacting the Fund at (800) 762-4848. This SAI
incorporates by reference the Prospectuses.
<PAGE>
CONTENTS
PAGE
Overview of the Fund 3
History of the Fund 3
Organization of the Fund 3
Management of the Fund 3
Principal Securities Holders 9
Distribution of Fund Shares 13
Supplemental Portfolio Information 14
Supplemental Investment Information 15
Supplemental Description of Investments 15
Supplemental Description of Investment Techniques 19
Supplemental Discussion of Risks 19
Supplemental Hedging Techniques 22
Investment Restrictions 29
Portfolio Transactions 33
Securities Valuation 34
Supplemental Tax Considerations 35
Shareholder Information 39
Calculation of Performance Data 39
Control Person 41
Custodian and Accounting Agent 41
Transfer and Disbursing Agent 41
Legal Counsel 41
Auditors 41
Financial Statements 41
Quality Rating Descriptions 42
2
<PAGE>
OVERVIEW OF THE FUND
HISTORY OF THE FUND
From its inception as a Maryland corporation on February 23, 1989 to
September 27, 1989, Fund's name was "FFTW Institutional Reserves Fund, Inc."
The Fund commenced operations on December 6, 1989. From September 27, 1989 to
July 22, 1991 the Fund's name was "FFTW Reserves, Inc." On July 22, 1991 the
Fund's name was changed to its present name, "FFTW Funds, Inc." The U.S.
Short-Term Portfolio commenced operations on December 6, 1989, the Worldwide
Portfolio commenced operations on April 15, 1992 and the Worldwide-Hedged
Portfolio commenced operations on May 19, 1992. These Portfolios were called
the Short-Term Series (and prior to September 18, 1991 as FFTW Institutional
Reserves Fund), Worldwide Series and Worldwide Hedged Series, respectively.
The Limited Duration Portfolio commenced operations on July 26, 1993. The
Global Tactical Portfolio originally commenced operations on March 25, 1993,
ceased operations on December 30, 1994, and recommenced operations on
September 14, 1995. The International Portfolio commenced operations on May
9, 1996, the Emerging Markets Portfolio commenced operations on August 12,
1997 and the Mortgage-Backed Portfolio commenced operations on April 29,
1996. All other Portfolios of the Fund have not commenced operations as of
December 31, 1999. The Board of Directors recently approved a name change for
several Portfolios, eliminating "Fixed Income" from their name. Effective
September 11, 1998, the name of the International-Hedged Portfolio was
changed to the Global Tactical Exposure Portfolio, the name of the Stable
Return Portfolio was changed to Limited Duration Portfolio and the name of
the Mortgage Total Return Portfolio was changed to Mortgage-Backed Portfolio.
ORGANIZATION OF THE FUND
STOCK ISSUANCE
The Fund's authorized capital stock consists of 5,000,000,000 shares, each with
$.001 par value. Each Portfolio has been allocated 200,000,000 shares, with
800,000,000 shares unallocated.
SHAREHOLDER VOTING
Each Portfolio's shares have equal voting rights--all shareholders have one vote
for each share held. All issued and outstanding shares are fully paid and
non-assessable, transferable, and redeemable at net asset value at the
shareholder's option. Shares have no preemptive or conversion rights.
The Fund's shares have non-cumulative voting rights. Thus, in a Board of
Directors election, shareholders holding more than 50% of the voting shares can
elect 100% of the Directors if they choose to do so. In such event, the holders
of the remaining voting shares (less than 50%) will be unable to elect any
person or persons to the Board of Directors.
CROSS PORTFOLIO LIABILITY
No Portfolio of the Fund shall be liable for the obligations of any other
Portfolio.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS AND OFFICERS
The Fund is managed by its Board of Directors. The individuals listed below are
the officers and directors of the Fund. An asterisk (*) placed next to the name
of each director means the director is an "interested person" of the Fund, as
defined in the Investment Company Act of 1940, as amended (the "1940 ACT"), by
virtue of his affiliation with the Fund or the Investment Adviser.
JOHN C HEAD III, 52, FUND DIRECTOR
1330 Avenue of the Americas, New York, New York. Mr. Head has been a Managing
Member of Head & Company L.L.C. since 1987. He is Chairman of the Board of ESG
Re Limited and a Director of PartnerRe Ltd. and other private companies.
3
<PAGE>
LAWRENCE B. KRAUSE, 70, FUND DIRECTOR
University of California - San Diego ("UCSD"), La Jolla, CA. Mr. Krause is a
member of the Editorial Advisory Board of the Political Science Quarterly, a
member of the Council on Foreign Relations, and Vice-Chairman of the U.S.
National Committee for Pacific Economic Cooperation. In December 1990, he was
selected as the first holder of the Pacific Economic Cooperation Chair at UCSD.
In 1989, Mr. Krause became the Director, Korea-Pacific Program at UCSD. In 1988,
he was named Coordinator of the Pacific Economic Outlook Project for the Pacific
Economic Cooperation Conference. Mr. Krause was the first appointment to the new
Graduate School of International Relations and Pacific Studies at UCSD and
joined the faculty as a professor on January 1, 1987. From 1969 - 1986, Mr.
Krause was a senior fellow of the Brookings Institution. Mr. Krause is also an
author of numerous publications.
*ONDER JOHN OLCAY, 63, FUND CHAIRMAN OF THE BOARD AND PRESIDENT AND CEO OF THE
FUND
200 Park Avenue, New York, NY. Mr. Olcay has been a shareholder, Managing
Director and Vice Chairman of the Investment Adviser since 1983.
*STEPHEN P. CASPER, 50, FUND DIRECTOR
200 Park Avenue, New York, NY. Mr. Casper has been a shareholder and Managing
Director of the Investment Adviser since December 1991. In addition, Mr. Casper
has been the Chief Financial Officer of the Investment Adviser since February
1990. From March 1984 through January 1990, Mr. Casper was Treasurer of
Rockefeller & Company, a registered investment adviser.
SAUL H. HYMANS, 62, FUND DIRECTOR
200 Park Avenue, New York, NY. Mr. Hymans has been a Professor of Economics at
the University of Michigan since 1964.
ANDREA REDMOND, 44, FUND DIRECTOR
200 Park Avenue, New York, NY. Ms. Redmond has been Managing Director of Russell
Reynolds Associates, Inc. since 1989.
WILLIAM E. VASTARDIS, 44, FUND SECRETARY AND TREASURER
600 Fifth Avenue, New York, NY. Mr. Vastardis serves as Managing Director and
Head of Fund Administration for Investors Capital Services, Inc. ("Investors
Capital"). Prior to his employment at Investors Capital, Mr. Vastardis served as
Vice President and head of the Vanguard Group Inc.'s private label
administration unit for seven years, after working six years in Vanguard's fund
accounting operations.
TIMOTHY F. OSBORNE, 33, FUND ASSISTANT TREASURER
200 Clarendon Street, Boston, MA. Mr. Osborne has served as Director of
Reporting & Compliance in the Mutual Fund Administration Department of Investors
Bank & Trust Company ("Investors Bank"), from 1997 to the present time.
Previous to this position, he was a Manager from 1995 -1997.
No employee of either the Investment Adviser, Investors Bank or Investors
Capital receives compensation from the Fund for acting as an officer or director
of the Fund. The Fund pays each director who is not a director, officer or
employee of the Investment Adviser, Investors Bank or Investors Capital or any
of their affiliates, an annual retainer of $35,000 which is paid in quarterly
installments. On February 19, 1999, the payment to directors was increased from
$5,000 quarterly and $1,000 per each meeting attended by a director to $8,750
quarterly with no per meeting attendance fee. On November 22, 1999, the
directors established the position of lead independent director and appointed
Mr. Head to such position for a two-year term. The lead independent director
will act as spokesperson for the remaining independent directors. The lead
independent director shall receive additional compensation of $8,750 on an
annual basis, which shall be payable quarterly.
4
<PAGE>
DIRECTOR'S COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 1999*
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
Director Aggregate Compensation Pension or Estimated Total Compensation
From Registrant Retirement Benefits Annual From Registrant and
Accrued As Part of benefits Upon Fund Complex Paid to
Fund Expenses Retirement Directors
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen P. Casper $0 $0 $0 $0
- - ----------------------------------------------------------------------------------------------------------------------
John C Head III $35,000 $0 $0 $35,000
- - ----------------------------------------------------------------------------------------------------------------------
Saul H. Hymans* $35,000 $0 $0 $35,000
- - ----------------------------------------------------------------------------------------------------------------------
Lawrence B. Krause $35,000 $0 $0 $35,000
- - ----------------------------------------------------------------------------------------------------------------------
Onder John Olcay $0 $0 $0 $0
- - ----------------------------------------------------------------------------------------------------------------------
Andrea Redmond** $8,750 $0 $0 $8,750
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Mr. Hymans received compensation during the year for services as an advisory
director.
**Ms. Redmond and Mr. Hymans were elected Directors by Fund shareholders on
November 21, 1999.
By virtue of the responsibilities assumed by the Investment Adviser, Investors
Bank and Investors Capital and their affiliates under their respective
agreements with the Fund, the Fund itself requires no employees in addition to
its officers.
Directors and officers of the Fund collectively owned less than 1% of the Fund's
outstanding shares as of December 31, 1999.
CODE OF ETHICS
The Fund, Investment Adviser and the Distributor have each adopted a Code of
Ethics (the "Code") under Rule 17j-1 of the 1940 Act governing the personal
investment activity by investment company personnel, including portfolio
managers, and other persons affiliated with the Fund, who may be in a position
to obtain information regarding investment recommendations or purchases and
sales of securities for a Portfolio. These Codes permit persons covered by the
Codes to invest in securities for their own accounts, including securities that
may be purchased or held by a Portfolio, subject to restrictions on investment
practices that may conflict with the interests of a Portfolio.
INVESTMENT ADVISER AND SUB-ADVISER AGREEMENTS
The Fund has a separate advisory agreement with respect to each Portfolio. The
Fund also has a separate sub-advisory agreement with respect to certain of the
Portfolios. Pursuant to their terms, the advisory agreements between the Fund
and the Investment Adviser (the "ADVISORY AGREEMENTS") and the sub-advisory
agreements (the "SUB-ADVISORY AGREEMENTS") between the Investment Adviser and
its affiliate, Fischer Francis Trees & Watts (the "SUB-ADVISER"), remain in
effect for two years following their date of execution. Thereafter, such
agreements will automatically continue for successive annual periods, provided
that they are specifically approved at least annually by the Board of Directors
or by the vote of a "majority" of a Portfolio's outstanding voting shares (as
defined in the 1940 Act) as a single class, provided, that in either event, the
continuance is also approved by:
a. at least a majority of the Board of Directors who are not "interested
persons" (as defined in the 1940 Act) of the Fund,
b. the Investment Adviser, or
c. the Sub-Adviser by vote cast in person at a meeting called for the purpose
of voting on such approval.
Each Advisory and Sub-Advisory Agreement is terminable without penalty:
a. on not less than 60 days' notice by the Board of Directors,
b. by a vote of the holders of a majority of the relevant Portfolio's
outstanding shares voting as a single class, or
c. upon not less than 60 days' notice by the Investment Adviser or the
Sub-Adviser.
5
<PAGE>
Each Advisory and Sub-Advisory Agreement will terminate automatically in the
event of its "assignment" (as defined in the 1940 Act).
INVESTMENT ADVISER'S/SUB-ADVISER'S PAYMENT OF FUND EXPENSES
The Investment Adviser pays all of its expenses arising from its performance
obligations pursuant to the Advisory Agreements, including all executive
salaries and expenses of the Fund's directors,
a. officers employed by the Investment Adviser, or
b. its affiliates and office rent of the Fund.
The Investment Adviser will pay all of the fees payable to its affiliate as
Sub-Adviser. The Sub-Adviser pays all of its expenses arising from the
performance of its obligations under the Sub-Advisory Agreements.
FUND'S PAYMENT OF FUND EXPENSES
Subject to the expense reimbursement provisions described in the Prospectus
under "Fund Expenses," other expenses incurred in the operation of the Fund are
borne by the Fund, including, without limitation:
a. brokerage commissions, h. expenses of printing and
distributing reports to
shareholders,
b. insurance premiums and extraordinary i. expenses of printing and filing
expenses such as litigation expenses, reports and other documents
filed with governmental agencies,
c. fees and expenses of independent j. notices and proxy materials to
attorneys, existing shareholders,
d. auditors, k. interest,
e. custodians, l. expenses of annual and special
shareholders' meetings,
f. administrators, m. membership dues in the Investment
Company Institute,
g. expenses of registering and n. fees and expenses of directors of
qualifying shares of the Fund under the Fund who are not employees of
federal and state laws and the Investment Adviser or its
regulations, affiliates.
PORTFOLIOS' PAYMENT OF FUND EXPENSES
Fund expenses directly attributable to a Portfolio are charged to that
Portfolio; other expenses are allocated proportionately among all the Portfolios
in relation to their net assets. As compensation for the services rendered by
the Investment Adviser under the Advisory Agreements, each Portfolio pays the
Investment Adviser a monthly advisory fee (U.S. Short-Term and Worldwide
Portfolios pay their fees quarterly) which is calculated by applying the
following annual percentage rates to such Portfolio's average daily net assets
for the month (quarter):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
PORTFOLIO RATES PORTFOLIO RATES
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage LIBOR 0.30% Global Tactical Exposure**** 0.10%
U.S. Short-Term* 0.15% Worldwide 0.40%
Limited Duration** 0.15% Worldwide-Hedged ***** 0.26%
Mortgage-Backed*** 0.10% International 0.40%
Asset-Backed 0.10% International Corporate 0.10%
High Yield 0.40% Emerging Markets 0.75%
Enhanced Equity Market 0.35% Global High Yield 0.50%
U.S. Treasury 0.30% Inflation-Indexed 0.40%
U.S. Corporate 0.10% Inflation-Indexed Hedged 0.40%
Broad Market 0.30%
------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective March 1, 1996, the Investment Adviser has voluntarily lowered
the advisory fee from 0.30%.
** Effective March 1, 1996, the Investment Adviser has voluntarily lowered
the advisory fee from 0.35%.
6
<PAGE>
*** Effective October 1, 1997, the Investment Adviser has voluntarily
lowered the advisory fee from 0.30%.
**** Effective September 1, 1997, the Investment Adviser has voluntarily
lowered the advisory fee from 0.40%.
***** Effective July 1, 1995, the Investment Adviser has voluntarily lowered
the advisory fee from 0.40%.
For the last three fiscal years, the amount of advisory fees (net of waivers and
reimbursements) paid by each Portfolio were as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME YEAR ENDED DEC. 31, 1999 YEAR ENDED DEC. 31, 1998 YEAR ENDED DEC. 31, 1997
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $15,401 $7,832 $7,718
U.S. Short-Term 830,461 856,044 598,652
Limited Duration 95,784 109,507 10,639
Mortgage-Backed 606,620 843,247 1,286,506
Global Tactical Exposure 384,911 334,646 500,355
Worldwide 245,735 323,633 308,466
Worldwide-Hedged 484,357 415,539 112,750
International 367,580 269,258 136,714
International Opportunities* 66,315 6,257 N/A
Emerging Markets** 1,251,344 1,191,914 191,177
</TABLE>
* Commenced operations on October 8, 1998.
** Commenced operations on August 12, 1997.
ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement dated May 29, 1998, Investors Capital
serves as the Fund's Administrator. Investors Capital (with assistance from its
affiliate, Investors Bank) assists in managing and supervising all aspects of
the general day-to-day business activities and operations of the Fund other than
investment advisory activities, including: custodial, transfer agent, dividend
disbursing, accounting, auditing, compliance and related services. Pursuant to
its terms, the Administration Agreement between the Fund and Investors Capital,
a Delaware corporation, will automatically continue for successive annual
periods subject to the approval of the Fund's Board of Directors.
The Fund pays Investors Capital a monthly fee at an annual rate of 0.07% of the
Fund's average daily net assets on the first $350 million, 0.05% thereafter up
to $2 billion, 0.04% thereafter up to $5 billion, and 0.03% on assets over $5
billion. The Fund also reimburses Investors Capital for certain costs. In
addition, the Fund has agreed to pay Investors Capital an incentive fee for
reducing a Portfolio expense ratio of one or more of the Fund's Portfolios below
a specified expense ratio. The maximum incentive fee is 0.02% of the average
daily net assets of a Portfolio.
7
<PAGE>
For the last three fiscal years, the amount of administration fees paid by each
Portfolio were as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME YEAR ENDED DEC. 31, 1999 YEAR ENDED DEC. 31, 1998 YEAR ENDED DEC. 31, 1997
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $11,012 $14,727 $13,160
U.S. Short-Term 248,144 323,059 267,418
Limited Duration 44,367 41,257 16,528
Mortgage-Backed 379,291 556,090 327,923
Global Tactical Exposure 261,177 237,408 152,302
Worldwide 33,611 42,545 40,802
Worldwide-Hedged 113,137 107,615 31,338
International 46,333 37,219 24,888
International Opportunities* 11,984 2,666 N/A
Emerging Markets** 113,137 112,704 18,709
</TABLE>
* Commenced operations October 8, 1998.
** Commenced operations on August 12, 1997.
8
<PAGE>
PRINCIPAL SECURITIES HOLDERS
U.S. SHORT-TERM PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER: PERCENT OF PORTFOLIO:
- - ------------------------------------- ---------------------
<S> <C>
GENERAL MOTORS EMPLOYEES GLOBAL GROUP PENSION TRUST 30.63%
C/O FISCHER FRANCIS TREES & WATTS, INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
BANK OF AMERICA FUND 12.74%
C/O FISCHER FRANCIS TREES & WATTS, INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
PHILIP MORRIS COMPANIES 10.67%
ATTN MARK WERNER (MASTER TRUST)
120 PARK AVENUE NEW YORK NY 10017-5523
MONSANTO SAVINGS AND INVESTMENT PLAN'S (SIP) 8.17%
FIXED INCOME FUND CASH BUFFER
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
MONSANTO COMPANY MASTER TRUST 5.12%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
</TABLE>
LIMITED DURATION PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER PERCENT OF PORTFOLIO
- - ------------------------------------ --------------------
<S> <C>
FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS CO INC. 49.23%
FIIOC AS AGENT FOR CERTAIN EMPLOYEE BENEFIT PLANS
100 MAGELLAN WAY (KW1C), COVINGTON, KY 41017-1987
ROCKDALE HEALTH SYSTEM INC. 21.81%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
CORP. FOR SUPPORTIVE HOUSING 14.56%
342 MADISON AVENUE, SUITE 505, NEW YORK, NY 10173
CONWAY HOSPITAL INC. 9.76%
C/O CENTURA BANK, ATTN: JIM WRIGHT
200 PROVIDENCE RD., SUITE 300, CHARLOTTE, NC 28207
</TABLE>
9
<PAGE>
MORTGAGE-BACKED PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER PERCENT OF PORTFOLIO
- - ------------------------------------ --------------------
<S> <C>
THE NORTHERN TRUST CO 25.77%
TR U/A DTD 4/1/93 FBO MONSANTO
DEFINED CONTRIBUTION AND EMPLOYEE STOCK OWNERSHIP TRUST
PO BOX 92956 (22-33706), CHICAGO, IL 60675
HARBOR CAPITAL GROUP TRUST FOR DEFINED BENEFIT PLANS 25.15%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT RETIREMENT 17.05%
STAFF BENEFITS PLAN
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVE, 46TH FLOOR, NEW YORK, NY 10166
THE SOLUTIA INC. SAVINGS AND INVESTMENT PLAN 11.92%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT STAFF
RETIREMENT PLAN 10.64%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVE, 46TH FLOOR, NEW YORK, NY 10166
REICHHOLD CHEMICALS INC. 6.94%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
</TABLE>
GLOBAL TACTICAL EXPOSURE PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER: PERCENT OF PORTFOLIO:
- - ------------------------------------- ---------------------
<S> <C>
HARBOR CAPITAL GROUP TRUST FOR DEFINED BENEFIT PLANS 30.34%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
NORTHROP CORPORATION EMPLOYEE BENEFIT PLAN 18.18%
1840 CENTURY PARK, W. LOS ANGELES, CA 90006
THE NORTHERN TRUST CO 14.46%
TR U/A DTD 4/1/93 FBO MONSANTO DEFINED CONTRIBUTION AND EMPLOYEE STOCK
OWNERSHIP TRUST
PO BOX 92956 (22-33706) CHICAGO, IL 60675
10
<PAGE>
<S> <C>
REICHHOLD CHEMICALS INC. 9.70%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
WILLIAM J ROMIG, TREASURER 9.57%
RETIREMENT PLAN OF NORFOLK SOUTHERN CORP AND PARTICIPATING
SUBSIDIARY COMPANIES C/O NORFOLK SOUTHERN COMPANIES
THREE COMMERCIAL PLACE, NORFOLK, VA 23510
THE SOLUTIA INC SAVINGS AND INVESTMENT PLAN 7.79%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
</TABLE>
WORLDWIDE PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER: PERCENT OF PORTFOLIO:
- - ------------------------------------ --------------------
<S> <C>
H E B INVESTMENT & RETIREMENT PLAN TRUST 27.45%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
BOB & CO C/O BANK OF BOSTON 17.33%
PO BOX 1809 BOSTON MA 02105
COMMUNITY FOUNDATION FOR SOUTHEASTERN MICHIGAN 14.05%
ATTN MARIAM C NOLAND, PRESIDENT
333 WEST FORT STREET, SUITE 2010, DETROIT, MI 48226
THE CHASE MANHATTAN BANK 9.84%
FBO ROCHESTER GENERAL PENSION A/C
PO BOX 1412 ATTN IFP ROCHESTER, NY 14603
GENEVA REGIONAL HEALTH SYSTEM INC. 7.75%
ATTN ACCOUNTING DEPT.
196 NORTH STREET, GENEVA, NY 14456
GENEVA GENERAL HOSPITAL 5.11%
196 NORTH STREET, GENEVA, NY 14456
</TABLE>
WORLDWIDE-HEDGED PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER: PERCENT OF PORTFOLIO:
- - ------------------------------------- ---------------------
<S> <C>
MAC & COMPANY 32.66%
MUTUAL FUNDS OPERATIONS
P.O. BOX 3198, PITTSBURGH, PA 15230
11
<PAGE>
<S> <C>
MITRA & CO. 14.09%
ATTN SHARON J LESCH, MUTUAL FUND SPECIALIST
1000 N WATER ST, 14TH FLOOR, MILWAUKEE, WI 53202
VERB & CO 9.89%
FBO COMMUNITY FOUNDATION SILICON VALLEY
4380 SW MACADAM, SUITE 450, PORTLAND OR 97201
THE NORTHERN TRUST COMPANY 9.30%
TR U/A DTD 06/30/95 MARS BENEFIT TRUST P O BOX 92956
ATTN MUTUAL FUNDS C 15 CHICAGO, IL 60675
LAW SCHOOL ADMISSION COUNCIL INC. 8.48%
ATTN MS ADELE SKOLITS VICE PRESIDENT
BOX 40 NEWTOWN, PA 18940-0040
WENDEL & CO. 7.22%
THE BANK OF NEW YORK MUTUAL FUND/REORG DEPT, A/C 706020
PO BOX 1066, WALL STREET STATION, NEW YORK, NY 10268
THE MCCALLIE SCHOOL 5.53%
500 DODDS AVENUE
CHATTANOOGA, TN 37404
STATE STREET BANK & TRUST 5.48%
TR U/A DTD 2/95 STATE STREET BANK AND TRUST AS TRUSTEE FOR THE GOLDMAN
SACHS PENSION PLAN
200 NEWPORT AVE., NORTH QUINCY, MA 02171
</TABLE>
INTERNATIONAL PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER: PERCENT OF PORTFOLIO:
- - ------------------------------------- ---------------------
<S> <C>
EVELYN AND WALTER HAAS, JR. FUND 21.79%
ONE LOMBARD STREET, SUITE 305, SAN FRANCISCO, CA 94111
JEWISH FEDERATION OF METRO CHICAGO 20.16%
JEFFREY C KING, CONTROLLER
1 SOUTH FRANKLIN STREET, #625, CHICAGO, IL 60606
COLONIAL WILLIAMSBURG FOUNDATION 16.49%
PO BOX 1776
WILLIAMSBURG, VA 23187-1776
NORTHERN TRUST COMPANY 14.55%
ATTEE FBO GATX MASTER RETIREMENT TRUST U/A DTD 12/19/79
A/C 22 54108 PO BOX 92956 801
S. CANAL STREET C1S, CHICAGO, IL 60675-2956
12
<PAGE>
<S> <C>
MAC & COMPANY 6.46%
P.O. BOX 3198
PITTSBURGH, PA 15230-3198
STATE STREET BANK & TRUST 5.70%
TR U/A DTD 10/1/85 RETIREMENT INCOME PLAN FOR EMPLOYEES OF COLONIAL
WILLIAMSBURG
PO BOX 1776
WILLIAMSBURG, VA 23187-1776
HF INVESTMENT LP 5.00%
ATTN RONALD L WHALEY
1700 OLD DEERFIELD ROAD
HIGHLAND PARK, IL 60035
</TABLE>
EMERGING MARKETS PORTFOLIO
As of April 1, 2000, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER: PERCENT OF PORTFOLIO:
- - ------------------------------------- ---------------------
<S> <C>
UTAH RETIREMENT SYSTEMS 54.26%
C/O FISHER FRANCIS TREES & WATTS, INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
THE 1199 HEALTH CARE EMPLOYEES PENSION PLAN 12.55%
C/O FISCHER FRANCIS TREES & WATTS, INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
HARBOR CAPITAL GROUP TRUST FOR DEFINED BENEFIT PLANS 10.91%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NY 10166
CASCADE INVESTMENT LLC 7.36%
C/O FISCHER FRANCIS TREES & WATTS INC.
200 PARK AVE, 46TH FLOOR, NEW YORK, NY 10166
</TABLE>
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by First Fund Distributors, Inc. ("First
Fund"), pursuant to a Distribution Agreement dated as of January 1, 2000, by and
among the Fund, Investors Bank and First Fund. No fees are payable by the Fund
pursuant to the Distribution Agreement, and the Administrator bears the expense
of First Fund's distribution activities. The Fund and First Fund have agreed to
indemnify one another against certain liabilities.
Investors should note that not every Portfolio of FFTW Funds, Inc. listed in the
Prospectus is registered in your state. If a Portfolio is not registered in your
state, you may not purchase shares of that Portfolio.
13
<PAGE>
SUPPLEMENTAL PORTFOLIO INFORMATION
PORTFOLIO TURNOVER
The following table represents each Portfolio's portfolio turnover for the
fiscal year ended December 31, 1999. Actual turnover may be higher than what is
set forth below, depending on current market conditions. The U.S. Short Term
Portfolio does not compute portfolio turnover.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME PORTFOLIO TURNOVER
-------------------------------------------------------------------------------------------------------------
<S> <C>
Limited Duration Portfolio 823%
-------------------------------------------------------------------------------------------------------------
Mortgage-Backed Portfolio 745%
-------------------------------------------------------------------------------------------------------------
Global Tactical Exposure 413%
-------------------------------------------------------------------------------------------------------------
Worldwide Portfolio 390%
-------------------------------------------------------------------------------------------------------------
Worldwide-Hedged Portfolio 404%
-------------------------------------------------------------------------------------------------------------
International Portfolio 569%
-------------------------------------------------------------------------------------------------------------
Emerging Markets Portfolio 137%
-------------------------------------------------------------------------------------------------------------
</TABLE>
ANTICIPATED PORTFOLIO TURNOVER
The following table represents each Portfolio's anticipated portfolio turnover
ranges for those portfolios that have not commenced operations as of
December 31, 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME ANTICIPATED PORTFOLIO TURNOVER
-------------------------------------------------------------------------------------------------------------
<S> <C>
Mortgage LIBOR Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
Asset-Backed Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
High Yield Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
Enhanced Equity Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
U.S. Treasury Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
U.S. Corporate Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
Broad Market Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
International Opportunities Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
International Corporate Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
Global High-Yield Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
Inflation-Indexed Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
Inflation-Indexed Hedged Portfolio Between 500% and 1,000% per year
-------------------------------------------------------------------------------------------------------------
</TABLE>
MORTGAGE LIBOR PORTFOLIO
The term "LIBOR" is an acronym for London InterBank Offered Rate. LIBOR is the
rate that most creditworthy international banks dealing in Eurodollars charge
each other for large loans. LIBOR is used as the base for other large Eurodollar
loans to less creditworthy corporations and governments. For purposes of this
Portfolio, home equity loans are considered mortgage-backed securities.
14
<PAGE>
Shares of the U.S. Short-Term Portfolio are not guaranteed by the U.S.
Government. The U.S. Short-Term Portfolio is not a "money market fund" and may
engage in investments not permitted by money market funds under applicable
regulations.
15
<PAGE>
U.S. TREASURY PORTFOLIO
Investors in most jurisdictions will be provided with income exempt from state
and local tax. Consult with a tax adviser to determine if your state and local
tax laws exempt income derived from U.S. Treasury mutual fund portfolios.
SUPPLEMENTAL INVESTMENT INFORMATION
SUPPLEMENTAL DESCRIPTIONS OF INVESTMENTS
The different types of securities, in which the Portfolios may invest, subject
to their respective investment objectives, policies and restrictions, are
described in the Prospectus under INVESTMENT INFORMATION." Additional
information concerning the characteristics of certain of the Portfolio's
investments is set forth below.
U.S. TREASURY AND U.S. GOVERNMENT AGENCY SECURITIES
U.S. Treasury and U.S. Government Agency Securities differ primarily in their
interest rates, the lengths of their maturities and the dates of their issuance.
While these securities are issued under the authority of an Act of Congress, the
U.S. Government is not obligated to provide financial support to the issuing
instrumentalities.
FOREIGN GOVERNMENT AND INTERNATIONAL AND SUPRANATIONAL AGENCY SECURITIES
Obligations issued by foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing powers issued or guaranteed by international
or supranational entities. These obligations may or may not be supported by the
full faith and credit of a foreign government, or several foreign governments.
Examples of international and supranational entities include the following
entities:
a. International Bank for Reconstruction, and Development ("WORLD BANK");
b. European Steel and Coal Community;
c. Asian Development Bank, the European Bank for Reconstruction; and
d. Development and the Inter-American Development Bank.
The governmental members, or "shareholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
BANK OBLIGATIONS
Each Portfolio limits its U.S. bank obligation investments to U.S. banks meeting
the Investment Adviser's creditworthiness criteria. Each applicable Portfolio
limits its investments in foreign bank obligations to foreign banks (including
U.S. branches of foreign banks) meeting the Investment Adviser's or the
Sub-Adviser's investment quality standards. Generally, such foreign banks must
be comparable to obligations of U.S. banks in which each Portfolio may invest.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
When participating in repurchase agreements, a Portfolio buys securities from a
vendor (e.g., a bank or securities firm) with the agreement that the vendor will
repurchase the securities at the same price plus interest at a later date.
Repurchase agreements may be characterized as loans secured by the underlying
securities. Repurchase transactions allow the Portfolio to earn a return on
available cash at minimal market risk. The Portfolio may be subject to various
delays and risks of loss should the vendor become subject to a bankruptcy
proceeding or if it is otherwise unable to meet its obligation to repurchase.
The securities underlying a repurchase agreement will be marked to market every
business day so that the value of such securities is at least equal to the value
of the repurchase price thereof, including the accrued interest thereon.
Repurchase and reverse repurchase agreements may also involve foreign government
securities with which there is an active repurchase market. The Investment
Adviser expects that such repurchase and reverse repurchase agreements will
primarily
16
<PAGE>
involve government securities of countries belonging to the Organization for
Economic Cooperation and Development ("OECD"). Transactions in foreign
repurchase and reverse repurchase agreements may involve additional risks.
The member countries of the OECD are: Australia, Austria, Belgium, Canada, Czech
Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,
Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway,
Poland, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom and the
United States.
DOLLAR ROLL TRANSACTIONS
"Dollar roll" transactions occur when a Portfolio sells GNMA certificates or
other mortgage-backed securities to a bank or broker-dealer (the "COUNTERPARTY")
along with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Portfolio receives a fee from the
counterparty as consideration for entering into the commitment to purchase.
Dollar rolls may be renewed over a period of several months with a new purchase
and repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. The transaction may be preceded by a firm
commitment agreement, pursuant to which, the Portfolio agrees to buy a security
on a future date. Portfolios will not use such transactions for leverage
purposes and will segregate cash, U.S. Government securities or other
appropriate securities in an amount sufficient to meet its purchase obligations
under the transactions.
Dollar roll transactions are similar to reverse repurchase agreements in that
they involve the sale of a security coupled with an agreement to repurchase.
Like all borrowings, a dollar roll involves costs to a Portfolio. For example,
while a Portfolio receives a fee as consideration for agreeing to repurchase the
security, the Portfolio may forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the Portfolio fee received, thereby effectively
charging the Portfolio interest on its borrowing. Further, although the
Portfolio can estimate the amount of expected principal prepayment over the term
of the dollar roll, a variation in the actual amount of prepayment could
increase or decrease the cost of the Portfolio's borrowing.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities can be issued in multiple classes. Such securities
are called multi-class mortgage-backed securities ("MBS") and the classes are
often referred to as "tranches." MBS securities are issued at a specific fixed
or floating coupon rate and have a stated maturity or final distribution date.
Principal prepayment on the Underlying Assets may cause the MBSs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all or most classes of the MBSs on a periodic
basis, typically monthly or quarterly. The principal and interest on the
Underlying Assets may be allocated among the several classes of a series of a
MBS in many different ways. In a relatively common structure, payments of
principal (including any principal prepayments) on the Underlying Assets are
applied to the classes of a series of a MBS in the order of their respective
stated maturities. No payment of principal will be made on any class of MBSs
until all other classes having an earlier stated maturity have been paid in
full.
OTHER ASSET-BACKED SECURITIES
The Investment Adviser expects that other asset-backed securities (unrelated to
mortgage loans) will be developed and offered to investors in the future.
Certain asset-backed securities have already been offered to investors including
securities backed by automobile loans and credit card receivables. Consistent
with each Portfolio's investment objectives and policies, a Portfolio may invest
in other types of asset-backed securities, as they become available.
ZERO COUPON SECURITIES AND CUSTODIAL RECEIPTS
Zero coupon securities include securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons or
receipts for their underlying principal (the "COUPONS") which have been
separated by their holder. Holders are typically custodian banks or investment
brokerage firms. A holder will separate the interest coupons from the underlying
principal (the "CORPUS") of the U.S. Treasury security. A number of securities
firms and banks have stripped the interest coupons and resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" ("TIGRS") and "Certificate of Accrual on Treasuries" ("CATS").
The underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are owned ostensibly by the bearer or holder
thereof), in trust on behalf of the owners thereof. Counsel to the underwriters
of these certificates or other evidences of ownership of the U.S. Treasury
17
<PAGE>
securities have stated that for Federal tax and securities law purposes,
purchasers of such certificates, such as a Portfolio, will most likely be deemed
the beneficial holders of the underlying U.S. Treasury securities.
Recently, the Treasury has facilitated transfer of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "Separate Trading of
Registered Interest and Principal of Securities" ("STRIPS"). Under the STRIPS
program, a Portfolio can have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of holding
certificates or other evidences of ownership of the underlying U.S. Treasury
securities.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
LOAN PARTICIPATIONS
A loan participation is an interest in a loan to an U.S. corporation (the
"CORPORATE BORROWER") which is administered and sold by an intermediary bank.
The borrower of the underlying loan will be deemed to be the issuer of the
participation interest except to the extent the Portfolio derives its rights
from the intermediary bank who sold the loan participation. Such loans must be
to issuers whose obligations a Portfolio may invest. Any participation purchased
by a Portfolio must be issued by a bank in the United States with assets
exceeding $1 billion. (See:"Supplemental Discussion of Risks").
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes are investments of fluctuating amounts and
varying interest rates made pursuant to direct arrangements between a Portfolio
(as lender) and a borrower. These notes are direct lending arrangements between
lenders and borrowers, and are generally non-transferable, nor are they
ordinarily rated by either Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P").
CURRENCY-INDEXED NOTES
In selecting the two currencies with respect to which currency-indexed notes are
adjusted, the Investment Adviser and the Sub-Adviser will consider the
correlation and relative yields of various currencies. A Portfolio may purchase
a currency-indexed obligation using the currency in which it is denominated and,
at maturity, will receive interest and principal payments thereon in that
currency. The amount of principal payable by the issuer at maturity, however,
will fluctuate in response to any changes in the exchange rates between the two
specified currencies during the period from the date the instrument is issued to
its maturity date. The potential for realizing gains as a result of changes in
foreign currency exchange rates may enable a Portfolio to hedge the currency in
which the obligation is denominated (or to effect cross-hedges against other
currencies) against a decline in the U.S. dollar value of investments
denominated in foreign currencies while providing an attractive market rate of
return. Each Portfolio will purchase such indexed obligations to generate
current income or for hedging purposes and will not speculate in such
obligations.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES
Principal exchange rate linked securities (or "PERLs") are debt obligations, the
principal on which is payable at maturity in an amount that may vary based on
the exchange rate between the U.S. dollar and a particular foreign currency. The
return on "standard" principal exchange rate linked securities is enhanced if
the foreign currency to which the security is linked appreciates against the
U.S. dollar. PERLs are adversely affected by increases in the foreign exchange
value of the U.S. dollar. Reverse principal exchange rate linked securities
differ from "standard" PERL securities in that their return is enhanced by
increases in the value of the U.S. dollar and adversely impacted by increases in
the value of the foreign currency. Security interest payments are generally made
in U.S. dollars at rates reflecting the degree of foreign currency risk assumed
or given up by the note's purchaser.
PERFORMANCE INDEXED PAPER
18
<PAGE>
Performance indexed paper (or "PIPs") is U.S. dollar-denominated commercial
paper, whose yield is linked to certain foreign exchange rate movements. The
investor's yield on performance indexed paper is established at maturity as a
function of spot exchange rates between the U.S. dollar and a designated
currency. This yield is within a stipulated range of return at the time the
obligation was purchased, lying within a guaranteed minimum rate below and a
potential maximum rate of return above market yields on U.S. dollar-denominated
commercial paper. Both the minimum and maximum rates of investment return
correspond to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
19
<PAGE>
OTHER FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Securities may be denominated in the currency of one nation although issued by a
governmental entity, corporation or financial institution of another nation. For
example, a Portfolio may invest in a British pound sterling-denominated
obligation issued by a United States corporation. Such investments involve
credit risks associated with the issuer and currency risks associated with the
currency in which the obligation is denominated. The Portfolio's investment
Adviser or the Sub-Adviser bases its decision to invest in any future foreign
currency exchange-related securities on the same general criteria applicable to
the Investment Adviser's or Sub-Adviser's decision for such Portfolio to invest
in any debt security. This includes the Portfolio's minimum ratings and
investment quality criteria, with the additional element of foreign currency
exchange rate exposure added to the Investment Adviser's or Sub-Adviser's
analysis of interest rates, issuer risk and other factors.
SECURITIES DENOMINATED IN MULTI-NATIONAL CURRENCY UNITS OR MORE THAN ONE
CURRENCY
An illustration of a multi-national currency unit is the European Currency Unit
(the "ECU"). The ECU is a "basket" consisting of specified currency amounts of
the member states of the European Community, a Western European economic
cooperative organization. The specific currency amounts comprising the ECU may
be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Adviser
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities.
FOREIGN CURRENCY WARRANTS
Foreign currency warrants such as currency exchange warrants ("CEWs") are
warrants entitling the holder to receive a cash amount from their issuer
(generally, for warrants issued in the United States in U.S. Dollars). This cash
amount is calculated pursuant to a predetermined formula, based on the exchange
rate between a specified foreign currency and the U.S. Dollar as of the exercise
date of the warrant. Foreign currency warrants are generally exercisable when
issued and expire at a specified date and time. Foreign currency warrants have
been issued in connection with U.S. Dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange risk,
which, from the point of view of prospective purchasers of the securities, is
inherent in the international fixed income marketplace. The formula used to
determine the amount payable upon exercise of a foreign currency warrant may
make the warrant worthless unless the applicable foreign currency exchange rate
moves in a particular direction (e.g., unless the U.S. Dollar appreciates or
depreciates against the particular foreign currency to which the warrant is
linked or indexed). Foreign currency warrants are subject to other risks
associated with foreign securities, including risks arising from complex
political or economic factors.
MUNICIPAL INSTRUMENTS
Municipal notes include such instruments as tax anticipation notes, revenue
anticipation notes, and bond anticipation notes. Municipal notes are issued by
state and local governments and public authorities as interim financing in
anticipation of tax collections, revenue receipts or bond sales. Municipal bonds
may be issued to raise money for various public purposes, and include general
obligation bonds and revenue bonds. General obligation bonds are backed by the
taxing power of the issuing municipality and considered the safest type of
bonds. Revenue bonds are backed by the revenues of a project or facility such as
the tolls from a toll bridge. Industrial development revenue bonds are a
specific type of revenue bond backed by the credit and security of a private
user. Revenue bonds are generally considered to have more potential risk than
general obligation bonds.
Municipal obligation rates can be floating, variable or fixed. The values of
floating and variable rate obligations are generally more stable than those of
fixed rate obligations in response to changes in interest rate levels. Variable
and floating rate obligations usually carry rights permitting a Portfolio to
sell them upon short notice at par value plus accrued interest. The issuers or
financial intermediaries providing rights to sell may support their ability to
purchase the obligations by obtaining credit with liquidity supports. These may
include lines of credit (conditional commitments to lend) or letters of credit,
(which are ordinarily irrevocable) issued by domestic banks or foreign banks
having a United States branch, agency or subsidiary. When considering whether an
obligation meets a Portfolio's quality standards, the Investment Adviser will
look at the creditworthiness of the party providing the right to sell as well as
to the quality of the obligation itself.
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Municipal securities may be issued to finance private activities, the interest
from which is an item of tax preference for purposes of the federal alternative
minimum tax. Such "private activity" bonds might include industrial development
revenue bonds, and bonds issued to finance such projects as solid waste disposal
facilities, student loans or water and sewage projects.
SUPPLEMENTAL DESCRIPTION OF INVESTMENT TECHNIQUES
BORROWING
Each Portfolio may borrow money temporarily from banks when:
a. it is advantageous to do so in order to meet redemption requests,
b. a Portfolio fails to receive transmitted funds from a shareholder on a
timely basis,
c. the custodian of the Fund fails to complete delivery of securities sold, or
d. a Portfolio needs cash to facilitate the settlement of trades made by the
Portfolio.
In addition, each Portfolio may, in effect, lend securities by engaging in
reverse repurchase agreements and/or dollar roll transactions and may, in
effect, borrow money by doing so. Securities may be borrowed by engaging in
repurchase agreements.
SECURITIES LENDING
With the exception of U.S. Short-Term, each Portfolio may lend out its
investment securities. The value of these securities may not exceed 33 1/3% of
the Portfolio's total assets. Such securities may be lent to banks, brokers and
other financial institutions if it receives in return, collateral in cash, U.S.
Government Securities or irrevocable bank stand-by letters of credit. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. The Fund may terminate the
loans at any time and the relevant Portfolio will then receive the loaned
securities within five days. During the loan period, the Portfolio receives the
income on the loaned securities and a loan fee thereby potentially increasing
its total return.
SUPPLEMENTAL DISCUSSION OF RISKS
The risks associated with the different types of securities in which the
Portfolios may invest are described in the Prospectus under "INVESTMENT
INFORMATION." Additional information concerning risks associated with certain of
the Portfolio's investments is set forth below.
FOREIGN INVESTMENTS
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets. Thus, many foreign company
securities are less liquid and their prices are more volatile than securities of
comparable domestic companies. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delivery of
securities may not occur at the same time as payment in some foreign markets.
Delays in settlement could result in temporary periods when a portion of
portfolio assets remains uninvested, earning no return. The inability of a
Portfolio to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities. Inability to
dispose portfolio securities due to settlement problems could result either in
portfolio losses due to subsequent declines in portfolio security value or, if
the Portfolio has entered into a contract to sell the security, could result in
possible liability to the purchaser. Comparatively speaking, there is less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States. In addition, a
foreign government may impose exchange control regulations, which may impact
currency exchange rates.
FOREIGN BANK OBLIGATIONS
Foreign bank obligations involve somewhat different investment risks than those
affecting obligations of United States banks. Included in these risks are
possibilities that:
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a. investment liquidity may be impaired due to future political and economic
developments;
b. their obligations may be less marketable than comparable obligations of
United States banks;
c. a foreign jurisdiction might impose withholding taxes on interest income
payable on those obligations;
d. foreign deposits may be seized or nationalized;
e. foreign governmental restrictions such as exchange controls may be adopted
that might adversely affect the payment of principal and interest on those
obligations;
f. the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks; or
g. the accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable
to United States banks.
Foreign banks are not generally subject to examination by any United States
government agency or instrumentality. Also, investments in commercial banks
located in some foreign countries are subject to additional risks because they
engage in commercial banking and diversified securities activities.
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions involve potential risks of loss, which differ from
those relating to the securities underlying the transactions. For example,
should the counterparty become insolvent, a Portfolio's right to purchase from
the counterparty might be restricted. Additionally, the value of such securities
may change adversely before the Portfolio is able to purchase them. Similarly, a
Portfolio may be required to purchase securities in connection with a dollar
roll at a higher price than may otherwise be available on the open market.
Since, as noted above, the counterparty is required to deliver a similar, but
not identical, security to a Portfolio, the security which the Portfolio is
required to buy under the dollar roll may be worth less than an identical
security. There can be no assurance that a Portfolio's use of the cash it
receives from a dollar roll will provide a return exceeding borrowing costs.
MORTGAGE AND ASSET-BACKED SECURITIES
Prepayments on securitized assets such as mortgages, automobile loans and credit
card receivables ("SECURITIZED Assets") generally increase with falling interest
rates and decrease with rising interest rates. Repayment rates are often
influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. In addition to prepayment risk, borrowers on the underlying
Securitized Assets may default in their payments creating delays or loss of
principal.
Non-mortgage asset-backed securities involve certain risks not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of a security interest in assets underlying the related mortgage collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicer to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on these securities.
New forms of asset-backed securities are continuously being created. While
Portfolios only invest in asset-backed securities the Investment Adviser
believes are liquid, market experience in some of these securities is limited
and liquidity may not have been tested in market cycles.
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FORWARD COMMITMENTS
Portfolios may purchase securities on a when-issued or forward commitment basis.
These transactions present a risk of loss should the value of the securities to
be purchased increase prior to the settlement date and the counterparty to the
trade fail to execute the transaction. If this were to occur, the Portfolio's
net asset value, including a security's appreciation or depreciation purchased
on a forward basis, would decline by the amount of such unrealized appreciation.
LOAN PARTICIPATIONS
Because the bank issuing a loan participation does not guarantee the
participation in any way, it is subject to the credit risks generally associated
with the underlying corporate borrower. It may be necessary under the terms of
the loan participation for a Portfolio to assert, through the issuing bank, such
rights as may exist against the underlying corporate borrower should the
underlying corporate borrower fail to pay principal and interest when due. Thus,
the Portfolio could be subject to delays, expenses and risks which are greater
than those which would have been involved if the Portfolio had purchased a
direct obligation (such as commercial paper) of the borrower. Moreover, under
the terms of the loan participation, the purchasing Portfolio may be regarded as
a creditor of the issuing bank (rather than of the underlying corporate
borrower), so that the Portfolio also may be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the bankruptcy or
insolvency of the corporate borrower, the loan participation might be subject to
certain defenses that can be asserted by a borrower as a result of improper
conduct by the issuing bank. The secondary market, if any, for these loan
participation interests is limited, and any such participation purchased by a
Portfolio will be treated as illiquid, until the Board of Directors determines
that a liquid market exists for such participations. Loan participations will be
valued at their fair market value, as determined by procedures approved by the
Board of Directors.
HIGH YIELD/HIGH RISK DEBT SECURITIES
The High Yield, Emerging Markets and Global High Yield Portfolios will invest
their assets in debt securities which are rated below investment-grade--that is,
rated below Baa by Moody's or BBB by S&P, and in unrated securities judged to be
of equivalent quality by the Investment Adviser or Sub-Adviser. Securities below
investment grade carry a high degree of risk (including the possibility of
default or bankruptcy of the issuers of such securities), and generally involve
greater price volatility and risk of principal and income. These securities may
be less liquid than securities in the higher rating categories and are
considered to be speculative. The lower the ratings of such debt securities, the
greater their risks render them like equity securities. See "Quality Ratings
Descriptions" in this SAI for a more complete description of the ratings
assigned by ratings organizations and their respective characteristics.
Economic downturns have in the past, and could in the future, disrupt the high
yield market and impair the ability of issuers to repay principal and interest.
Also, an increase in interest rates would have a greater adverse impact on the
value of such obligations than on comparable higher quality debt securities.
During an economic downturn or period of rising interest rates, highly leveraged
issues may experience financial stresses, which could adversely affect their
ability to service their principal and interest payment obligations. Prices and
yields of high yield securities will fluctuate over time and, during periods of
economic uncertainty, volatility of high yield securities may adversely affect
the Portfolio's net asset value. In addition, investments in high yield zero
coupon or pay-in-kind bonds, rather than income-bearing high yield securities,
may be more speculative and may be subject to greater fluctuations in value due
to changes in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market or because of a decline in the
value of such securities. A thin trading market may limit the ability of the
Portfolio to accurately value high yield securities it holds and to dispose of
those securities. Adverse publicity and investor perceptions may decrease the
values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. For these reasons, it is
the policy of the Investment Adviser and Sub-Adviser not to rely exclusively on
ratings issued by established credit rating agencies, but to supplement such
ratings with its own independent and on-going review of credit quality. The
achievement of the Portfolio's investment objective by investment in such
securities may be more dependent on the Investment Adviser's or Sub-Adviser's
credit analysis than is the case for higher quality bonds. Should the rating of
a portfolio security be downgraded, the Investment Adviser or Sub-Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of such security. Prices for below investment-grade securities may be
affected by legislative and regulatory developments.
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SUPPLEMENTAL HEDGING TECHNIQUES
Each of the Portfolios may enter into forward foreign currency contracts (a
"FORWARD CONTRACT") and may purchase and write (on a covered basis)
exchange-traded or over-the-counter ("OTC") options on currencies, foreign
currency futures contracts and options on foreign currency futures contracts.
These contracts are primarily entered into to protect against a decrease in the
U.S. dollar equivalent value of its foreign currency portfolio securities or the
payments thereon that may result from an adverse change in foreign currency
exchange rates. Under normal circumstances, Worldwide-Hedged and
Inflation-Indexed Hedged intends to hedge its currency exchange risk to the
extent feasible, but there can be no assurance that all of the assets of each
Portfolio denominated in foreign currencies will be hedged at any time, or that
any such hedge will be effective. Each of the other Portfolios may at times, at
the discretion of the Investment Adviser and the Sub-Adviser, hedge all or some
portion of its currency exchange risk.
Conditions in the securities, futures, options and foreign currency markets will
determine whether and under what circumstances the Fund will employ any of the
techniques or strategies described below. The Fund's ability to pursue these
strategies may be limited by applicable regulations of the Commodity Futures
Trading Commission ("CFTC") and the federal tax requirements applicable to
regulated investment companies. (See: "Investment Information" in the Prospectus
and "Supplemental Tax Considerations" below for more information on hedging.)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS & ASSOCIATED RISKS
Each Portfolio may, and generally certain Portfolios will, purchase and sell
forward contracts. A forward contract obligates one party to purchase and the
other party to sell a definite foreign currency amount at some specified future
date. Purchasing or selling forward contracts may help offset declines in the
U.S. dollar-equivalent value of a Portfolio's foreign currency denominated
assets and the income available for distribution to Portfolio shareholders.
These declines in the U.S. dollar-equivalent value may be the result of adverse
exchange rate changes between the U.S. dollar and the various foreign currencies
in which a Portfolio's assets or income may be denominated. The U.S.
dollar-equivalent value of the principal amount of and rate of return on foreign
currency denominated securities will decline should the U.S. dollar exchange
rate rise in relation to that currency. Such declines could be partially or
completely offset by an increase in the value of a forward contract on that
foreign currency.
In addition to entering into forward contracts with respect to assets that a
Portfolio holds (a "POSITION HEDGE"), the Investment Adviser or the Sub-Adviser
may purchase or sell forward contracts or foreign currency options in a
particular currency with respect to specific anticipated transactions (a
"TRANSACTION HEDGE"). By purchasing forward contracts, the Investment Adviser or
Sub-Adviser can establish the exchange rate at which a Portfolio will be
entitled to exchange U.S. dollars for a foreign currency or a foreign currency
for U.S. dollars at some point in the future. Thus, such contracts may lock in
the U.S. dollar cost of purchasing foreign currency denominated securities, or
set the U.S. dollar value of the income from securities it owns or the proceeds
from securities it intends to sell.
While the use of foreign currency forward contracts may protect a Portfolio
against declines in the U.S. dollar-equivalent value of the Portfolio's assets,
such use will also reduce the possible gain from advantageous changes in the
value of the U.S. dollar against particular currencies in which their assets are
denominated. Moreover, the use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. dollar-equivalent value of the
prices of or rates of return on the assets held in the Portfolio.
The use of such techniques will subject the Portfolio to certain risks:
a. the foreign exchange markets can be highly volatile and are subject to sharp
price fluctuations;
b. trading forward contracts can involve a degree of leverage, and relatively
small movements in the rates of exchange between the currencies underlying
a contract could result in immediate and substantial losses to the
investor;
c. trading losses that are not offset by corresponding gains in assets being
hedged could reduce the value of assets held by a Portfolio;
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d. the precise matching of the forward contract amounts and the value of the
hedged portfolio securities involved will not generally be possible. The
future value of such foreign currency denominated portfolio securities will
change as a consequence of market movements in the value of those
securities. This change is unrelated to fluctuations in exchange rates and
the U.S. dollar-equivalent value of such assets between the date the forward
contract is entered into and the date that it is sold. Thus, it may be
necessary for a Portfolio to purchase additional foreign currency in the
cash market (and bear the expense of such purchase), if the market value of
the security is less than the amount of the foreign currency it may deliver,
pursuant to the forward contract.
The success of any currency hedging technique depends on the ability of the
Investment Adviser or Sub-Adviser to predict correctly, movements in foreign
currency exchange rates. If the Investment Adviser or Sub-Adviser incorrectly
predicts the direction of such movements, or if unanticipated changes in foreign
currency exchange rates occur, a Portfolio's performance may decline because of
the use of such contracts. The accurate projection of currency market movements
is extremely difficult, and the successful execution of a hedging strategy is
highly uncertain.
Portfolio costs of engaging in foreign currency forward contracts will vary with
factors such as:
a. the foreign currency involved;
b. the length of the contract period; and
c. the market conditions then prevailing, including general market expectations
as to the direction of the movement of various foreign currencies against
the U.S. dollar.
Furthermore, the Investment Adviser or Sub-Adviser may not be able to purchase
forward contracts with respect to all of the foreign currencies in which the
Portfolio's portfolio securities may be denominated. In those circumstances, the
correlation between movement in the exchange rates of the subject currency and
the currency in which the portfolio security is denominated may not be precise.
Moreover, if the forward contract is entered into in an over-the-counter
transaction, the Portfolio generally will be exposed to the credit risk of its
counterparty. Should a Portfolio enter into such contracts on a foreign
exchange, the contract will be subject to the rules of that foreign exchange.
Foreign exchanges may impose significant restrictions on the purchase, sale or
trading of such contracts, and may impose limits on price moves. Such limits may
affect significantly, the ability to trade the contract or otherwise, to close
out the position and could create potentially significant discrepancies between
the cash and market value of the position in the forward contracts. Finally, the
cost of purchasing forward contracts in a particular currency will reflect, in
part, the rate of return available on instruments denominated in that currency.
The cost of purchasing forward contracts to hedge foreign currency portfolio
securities may reduce that rate of return toward the rate of return that would
be earned on assets denominated in U.S. dollars.
OTHER STRATEGIES OF CERTAIN PORTFOLIOS
Certain Portfolios may use forward contracts to hedge the value of portfolio
securities against changes in exchange rates. These Portfolios may attempt to
enhance its portfolio return by entering into forward contracts and currency
options, as discussed below, in a particular currency in an amount in excess of
the value of its assets denominated in that currency or when it does not own
assets denominated in that currency. If the Investment Adviser or Sub-Adviser is
not able to predict correctly the direction and extent of movements in foreign
currency exchange rates, entering into such forward or option contracts may
decrease rather than enhance the Portfolio's return. In addition, if the
Portfolio enters into forward contracts when it does not own assets denominated
in that currency, the Portfolio's volatility may increase and losses on such
contracts will not be offset by increases in the value of portfolio assets.
OPTIONS ON FOREIGN CURRENCIES
Each Portfolio may purchase and sell (or write) put and call options on foreign
currencies protecting against:
a. a decline in the U.S. dollar-equivalent value of its portfolio securities or
payments due thereon, or
b. a rise in the U.S. dollar-equivalent cost of securities that it intends to
purchase.
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A foreign currency put option grants the holder the right, but not the
obligation to sell a specified amount of a foreign currency to its counterparty
at a predetermined price on a later date. Conversely, a foreign currency call
option grants the holder the right, but not the obligation, to purchase a
specified amount of a foreign currency at a predetermined price at a later date.
As in the case of other types of options, a Portfolio's benefits from the
purchase of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction, or to the extent anticipated, the Portfolio
could sustain losses on transactions in foreign currency options, requiring them
to forego a portion or all of the benefits of advantageous changes in such
rates.
Each Portfolio may write options on foreign currencies for hedging purposes. For
example, where a Portfolio anticipates a decline in the dollar value of foreign
currency denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option most likely will not be
exercised, and the decrease in value of portfolio securities will be offset by
the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar costs of securities to be acquired, a Portfolio could
write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised, allowing the Portfolio to
hedge such increased costs up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium. If movement in
the expected direction does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be fully offset by the amount of the premium. Through the
writing of options on foreign currencies, a Portfolio also may be required to
forego all or a portion of the benefits that might otherwise have been obtained
from favorable movements in exchange rates.
OPTIONS ON SECURITIES
Each Portfolio may also enter into closing sale transactions with respect to
options it has purchased. A put option on a security grants the holder the
right, but not the obligation, to sell the security to its counterparty at a
predetermined price at a later date. Conversely, a call option on a security
grants the holder the right, but not the obligation, to purchase the security
underlying the option at a predetermined price at a later date.
Normally, a Portfolio would purchase put options in anticipation of a decline in
the market value of securities it holds or securities it intends to purchase. If
a Portfolios purchases a put option and the value of the security decreases
below the strike price of the option, the Portfolio has the right to sell that
security to its counterparty for the strike price (or realize the value of the
option by entering into a closing transaction). Thus, the Portfolio would
protect itself against any further decrease in the value of the security during
the term of the option.
Conversely, if the Investment Adviser or Sub-Adviser anticipates that a security
that it intends to acquire will increase in value, it might cause a Portfolio to
purchase a call option on that security or securities similar to that security.
If the value of the security does rise, the call option may wholly or partially
offset the increased price of the security. As in the case of other types of
options, however, the benefit to the Portfolio will be reduced by the amount of
the premium paid to purchase the option and any related transaction costs. If,
however, the value of the security falls instead of rises, the Portfolio will
have foregone a portion of the benefit of the decreased price of the security in
the amount of the option premium and the related transaction costs.
A Portfolio would purchase put and call options on securities indices for the
same purposes, as it would purchase options on securities. Options on securities
indices are similar to options on securities except that the options on
securities reflect the change in price of a group of securities rather than an
individual security. The exercise of options on securities indices is settled in
cash rather than by delivery of the securities comprising the index underlying
the option.
A Portfolio's transactions in options on securities and securities indices will
be governed by the rules and regulations of the respective exchanges, boards of
trade or other trading facilities on which the options are traded.
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CONSIDERATIONS CONCERNING OPTIONS
The writer of an option receives a premium, which it retains regardless of
whether the option is exercised. The purchaser of a call option has the right to
purchase the securities or currency subject to the option at a specified price
(the "EXERCISE PRICE") for a specified length of time. By writing a call option,
the writer becomes obligated during the term of the option, and upon exercise of
the option, to sell the underlying securities or currency to the purchaser
against receipt of the exercise price. The writer of a call option also loses
the potential for gain on the underlying securities or currency in excess of the
exercise price of the option during the period that the option is open.
Conversely, the purchaser of a put option has the right to sell the securities
or currency subject to the option, to the writer of the put option at the
specified exercise price for a specified length of time. Upon exercising a put
option, the writer of the put option is obligated to purchase securities or
currency underlying the option at the exercise price during the term of the
option. A writer might, therefore, be obligated to purchase the underlying
securities or currency for more than their current market price or U.S. dollar
value, respectively.
Each Portfolio may purchase and sell both exchange-traded and OTC options.
Although many options on equity securities and options on currencies are
currently exchange-traded, options on debt securities are primarily traded in
the over-the-counter market. The writer of an exchange-traded option wishing to
terminate its obligation may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. Options of the same series are options with respect to the same
underlying security or currency, having the same expiration date and the same
exercise price. Likewise, an investor who is the holder of an option may
liquidate a position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
An exchange-traded option position may be closed out only where a secondary
market exists for an option of the same series. For a number of reasons, a
secondary market may not exist for options held by a Portfolio, or trading in
such options might be limited or halted by the exchange on which the option is
trading. In such cases, it might not be possible to effect closing transactions.
(e.g., options the Portfolio has purchased with the result that the Portfolio
would have to exercise the options in order to realize any profit). If the
Portfolio is unable to effect a closing purchase transaction in a secondary
market in an option it has written, it will not be able to sell the underlying
security or currency until either: 1) the option expires, or 2) the Portfolio
delivers the underlying security or currency upon exercise or otherwise cover
its position.
EXCHANGE TRADED & OTC OPTIONS
U.S. exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed. Thus, in effect, every
exchange-traded option transaction is guaranteed. In contrast, over the counter
("OTC") options are contracts between a Portfolio and its counterparty with no
clearing organization guarantee. Thus, when the Portfolio purchases OTC options,
it relies on the dealer from whom it purchased the option to make or take
delivery of the securities underlying the option. The dealer's failure to do so
would result in the loss of the premium paid by the Portfolio as well as the
loss of the expected benefit of the transaction. The Investment Adviser or
Sub-Adviser will purchase options only from dealers determined by the Investment
Adviser to be creditworthy.
Exchange-traded options generally have a continuous liquid market whereas OTC
options may not. Consequently, a Portfolio will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Portfolio writes an OTC option, it
generally will be able only to close out the OTC option prior to its expiration
by entering into a closing purchase transaction with the original issuing dealer
of the OTC option. A Portfolio will only enter into OTC options with dealers who
agree to enter into them, and those who are capable of entering into closing
transactions with the Portfolio. There can be no assurance that the Portfolio
will be able to liquidate an OTC option at a favorable price at any time prior
to expiration. Until the Portfolio is able to effect a closing purchase
transaction in a covered OTC call option the Portfolio has written, it will not
be able to liquidate securities used as cover until the option expires, it is
exercised or different cover is substituted. In the event of insolvency of the
counterparty, the Portfolio may be unable to liquidate an OTC option. In the
case of options written by a Portfolio, the inability to enter into a closing
purchase transaction may result in material losses to the Portfolio. For
example, since the Portfolio must maintain a covered position with respect to
any call option on a security it writes, the Portfolio may be limited in its
ability to sell the underlying security while the option is outstanding. This
may impair the Portfolio's ability to sell a portfolio security at a time when
such a sale might be advantageous.
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<PAGE>
FOREIGN CURRENCIES
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
available is generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller transactions (i.e.,
less than $1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent that the
U.S. options markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options market until they
reopen. Foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options. Thus, investors may be disadvantaged by having to deal
in an odd lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less favorable
than for round lots.
The use of options to hedge a Portfolio's foreign currency-denominated portfolio
or to enhance return raises additional considerations. As described above, a
Portfolio may, among other things, purchase call options on securities it
intends to acquire in order to hedge against anticipated market appreciation in
the price of the underlying security or currency. If the market price does
increase as anticipated, the Portfolio will benefit from that increase but only
to the extent that the increase exceeds the premium paid and related transaction
costs. If the anticipated rise does not occur, or if it does not exceed the
amount of the premium and related transaction costs, the Portfolio will bear the
expense of the options without gaining an offsetting benefit. If the market
price of the underlying currency or securities should fall instead of rise, the
benefit the Portfolio obtains from purchasing the currency or securities at a
lower price will be reduced by the amount of the premium paid for the call
options and by transaction costs.
A Portfolio also may purchase put options on currencies or portfolio securities
when it believes a defensive posture is warranted. Protection is provided during
the life of a put option because the put gives the Portfolio the right to sell
the underlying currency or security at the put exercise price, regardless of a
decline in the underlying currency's or security's market price below the
exercise price. This right limits the Portfolio's losses from the currency's or
security's possible decline in value below the exercise price of the option to
the premium paid for the option and related transaction costs. If the market
price of the currency or the Portfolio's securities should increase, however,
the profit that the Portfolio might otherwise have realized will be reduced by
the amount of the premium paid for the put option and by transaction costs.
The value of an option position will reflect, among other things:
the current market price of the underlying currency or security;
b. the time remaining until expiration;
c. the relationship of the exercise price to the market price;
d. the historical price volatility of the underlying currency; and
e. security and general market conditions.
For this reason, the successful use of options as a hedging strategy depends
upon the ability of the Investment Adviser or the Sub-Adviser to forecast the
direction of price fluctuations in the underlying currency or securities market.
Options normally have expiration dates of up to nine months. The exercise price
of the options may be below, equal to or above the current market values of the
underlying securities or currency at the time the options are written. Options
purchased by a Portfolio expiring unexercised have no value, and therefore a
loss will be realized in the amount of the premium paid (and related transaction
costs). If an option purchased by any Portfolio is inthemoney prior to its
expiration date, unless the Portfolio exercises the option or enters into a
closing transaction with respect to that position, the Portfolio will not
realize any gain on its option position.
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<PAGE>
A Portfolio's activities in the options market may result in a higher turnover
rates and additional brokerage costs. Nevertheless, the Portfolio may also save
on commissions and transaction costs by hedging through such activities, rather
than buying or selling securities or foreign currencies in anticipation of
market moves, or foreign exchange rate fluctuations.
FUTURES CONTRACTS
Each Portfolio may enter into contracts for the purchase or sale for future
delivery (a "FUTURES CONTRACT") of:
a. fixed-income securities or foreign currencies;
b. contracts based on financial indices including any index of U.S. Government
Securities;
c. foreign government securities; or
d. corporate debt securities.
U.S. futures contracts have been designed by exchanges, which have been
designated as "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchanges and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A Portfolio will
enter into futures contracts, based on debt securities that are backed by the
full faith and credit of the U.S. Government, such as long-term U.S. Treasury
Bonds, Treasury Notes, GNMA-modified pass-through mortgage-backed securities and
three-month U.S. Treasury Bills. Portfolios may also enter into futures
contracts based on securities that would be eligible investments for such
Portfolio and that are denominated in currencies other than the U.S. dollar.
This includes, without limitation, futures contracts based on government bonds
issued in the United Kingdom, Japan, the Federal Republic of Germany, France and
Australia and futures contracts based on three-month Euro-deposit contracts in
the major currencies.
A Portfolio would purchase or sell futures contracts to attempt to protect the
U.S. dollar-equivalent value of its securities from fluctuations in interest or
foreign exchange rates without actually buying or selling securities or foreign
currency. For example, if a Portfolio expected the value of a foreign currency
to increase against the U.S. dollar, the Portfolio might enter into futures
contracts for the sale of that currency. Such a sale would have much the same
effect as selling an equivalent value of foreign currency. If the currency did
increase, the value of the securities held by the Portfolio would decline, but
the value of the futures contracts would increase at approximately the same
rate. Thus, the Portfolio's net asset value would not decline as much as it
otherwise would have.
Although futures contracts, by their terms, call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities or currency. The offsetting of a contractual
obligation is accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for delivery in the
same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the securities or
currency. Since all transactions in the futures market are performed through a
clearinghouse associated with the exchange on which the contracts are traded, a
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
At the time a futures contract is purchased or sold, the Portfolio must allocate
cash or securities as a deposit payment ("INITIAL MARGIN"). It is expected that
the initial margin on U.S. exchanges may range from approximately 3% to
approximately 15% of the value of the securities or commodities underlying the
contract. Under certain circumstances, however, such as periods of high
volatility, an exchange may require the Portfolio to increase the level of its
initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in cash of "variation margin" may be
required, a process known as "marking to the market." Each day, the Portfolio
will be required to provide (or will be entitled to receive) variation margin in
an amount equal to any decline (in the case of a long futures position) or
increase (in the case of a short futures position) in the contract's value since
the preceding day.
Futures contracts entail special risks. Among other things, the ordinary spreads
between values in the cash and futures markets, due to differences in the
character of these markets, are subject to distortions relating to:
29
<PAGE>
a. investors' obligations to meet additional variation margin requirements;
b. decisions to make or take delivery, rather than entering into offsetting
transactions; and
c. the difference between margin requirements in the securities markets and
margin deposit requirements in the futures market.
The possibility of such distortion means that a correct forecast of general
market, foreign exchange rate or interest rate trends by the Investment Adviser
or Sub-Adviser may not result in a successful transaction.
The Investment Adviser believes that use of such contracts and options thereon
will benefit the Portfolios. However, if the Investment Adviser's judgment about
the general direction of securities market movements, foreign exchange rates or
interest rates is incorrect, a Portfolio's overall performance would be poorer
than if it had not entered into any such contracts or purchased or written
options thereon. For example, if a Portfolio hedges against an interest rate
increase, (which would adversely affect the price of debt securities held) and
interest rates decrease, the Portfolio would lose part or all of the benefit of
the increased value of its assets, which it had hedged. This would result in
offsetting losses in its futures positions. In such situations, if the Portfolio
has insufficient cash, it may have to sell some of its assets to meet daily
variation margin requirements. Any such sale of assets may, but will not
necessarily, be at increased prices which reflect the rising market. Thus, the
Portfolio may have to sell assets at a time when it may be disadvantageous to do
so.
A Portfolio's ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the development and
maintenance of a liquid market. Although a Portfolio generally will purchase or
sell only those futures contracts and options thereon for which there appears to
be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option thereon at any
particular time. Where it is not possible to effect a closing transaction in a
contract at a satisfactory price, the Portfolio would have to make or take
delivery under the futures contract or, in the case of a purchased option,
exercise the option or let it expire. In the case of a futures contract that a
Portfolio has sold and is unable to close out, the Portfolio would be required
to maintain margin deposits on the futures contract and to make variation margin
payments until the contract is closed.
Under certain circumstances, exchanges may establish daily limits of the amount
that the price of a futures contract or related option contract may vary either
up or down from the previous day's settlement price. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may prevent the liquidation of unfavorable positions. Futures or options
contract prices could move to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
positions and subjecting some traders to substantial losses.
Buyers and sellers of foreign currency futures contracts are generally subject
to the same risks that apply to the use of futures. In addition, there are risks
associated with foreign currency futures contracts and their use as hedging
devices similar to those associated with options on foreign currencies described
above. Further, settlement of a foreign currency futures contract must occur
within the country issuing the underlying currency. Thus, a Portfolio must
accept delivery of the underlying foreign currency in accordance with any U.S.
or foreign restrictions or regulations regarding the maintenance of foreign
banking arrangements by U.S. residents. It may also be required to pay any fees,
taxes or charges associated with such delivery that are assessed in the country
of the underlying currency.
OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a futures contract is similar in some respects
to the purchase of a call option on an individual security or currency.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based, or the price of the underlying
securities or currency, it may or may not be less risky than ownership of the
futures contract or the underlying securities or currency. As with the purchase
of futures contracts, a Portfolio that is not fully invested may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates or a change in foreign exchange rates.
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<PAGE>
Writing a call option on a futures contract constitutes a partial hedge against
decreasing prices of the security or foreign currency. The hedge is deliverable
upon exercise of the futures contract. If the futures price of the option at
expiration is below the exercise price, a Portfolio will retain the full amount
of the option premium, providing a partial hedge against any decline that may
have occurred in the Portfolio's holdings. Writing a put option on a futures
contract constitutes a partial hedge against increasing prices of the security
or foreign currency. The hedge is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option premium
providing a partial hedge against any increase in the price of securities, which
a Portfolio intends to purchase. If a Portfolio's put or call option is
exercised, it will incur a loss that will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its securities and changes in the value of its futures positions, a
Portfolio's losses from existing options on futures may be reduced or increased
by changes in the value of its securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on Portfolio securities. Thus, a
Portfolio may purchase a put option on a futures contract to hedge against the
risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a futures
contract is:
RISK = THE PREMIUM PAID FOR THE OPTION + RELATED TRANSACTION COSTS
In addition to the correlation risks discussed above, purchasing an option also
entails the risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions in such options is subject to
the maintenance of a liquid secondary market. To mitigate this problem, a
Portfolio will not purchase or write options on foreign currency futures
contracts, unless and until the market for such options has developed
sufficiently. This would make clearer the risks connected with such options, and
would allow the are not greater than the risks in connection with transactions
in the underlying foreign currency futures contracts. This is subject to the
Investment Adviser's or Sub-Adviser's discretion. Compared to the purchase or
sale of foreign currency futures contracts, the purchase of call or put options
thereon involves less potential risk to the Portfolio because the maximum amount
at risk is the premium paid for the option (plus transaction costs). However,
there may be circumstances when the purchase of a call or put option on a
foreign currency futures contract would result in a loss. This would occur when
there is no movement in the price of the underlying currency or futures
contract, when use of the underlying futures contract would not.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions listed below relating to the
investment of each Portfolio's assets and its activities other than Emerging
Markets Portfolio, International Portfolio and Limited Duration Portfolio. These
are fundamental policies that may not be changed without the approval of the
holders of a majority of the outstanding voting securities of a Portfolio (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares). Portfolios may
not:
a. borrow money, except in conformity with the limits set forth in the 1940
Act; notwithstanding the foregoing, short-term credits necessary for
settlement of securities of transactions are not considered borrowings;
b. issue senior securities, except to the extent permitted under the 1940 Act;
c. underwrite securities of other issuers;
d. purchase or sell real estate (other than marketable securities representing
interests in, or backed by, real estate); or
e. purchase or sell physical commodities or related commodity contracts.
f. invest more than 25% of its total assets in the securities of issuers in
any industry (other than U.S. Government Securities, the banking industry
and the finance industry). For purposes of this test, finance will be
deemed to include all asset-backed securities.
g. make loans to other persons, except by:
i. the purchase of a portion of an issue of debt obligations in which a
Portfolio is authorized to invest in accordance with its investment
objectives, and
ii. engaging in repurchase agreements.
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<PAGE>
The Fund has also adopted the non-fundamental investment restrictions listed
below relating to the investment of each Portfolio's assets and its activities
other than Emerging Markets Portfolio, International Portfolio and Limited
Duration Portfolio. These non-fundamental policies may be changed by the Board
of Directors without the approval of shareholders. The Portfolios may not:
a. purchase securities on margin (although deposits referred to as "margin"
will be made in connection with investments in futures contracts, as
explained above, and a Portfolio may obtain such short-term credits as may
be necessary for the clearance of purchases and sales of securities);
b. invest in companies for the purpose of exercising control or management.
c. purchase or retain the securities of any issuer if the officers, directors
or trustees of the Fund, or its advisors, or managers own beneficially more
than one half of one percent of the securities of an issuer, or together own
beneficially more than five percent of the securities of that issuer;
d. invest more than fifteen percent (15%) of the Fund's total assets in the
securities of issuers which together with any predecessors have a record of
less than three years continuous operation or securities of issuers, which
are restricted as to disposition.
From time to time, a Portfolio's investment policy may restrict or limit the
maximum percentage of the Portfolio's assets that may be invested in any
security or other asset, or set forth a policy regarding quality standards. If
so, such standard or percentage limitation shall be determined immediately
after, and as a result of, the Portfolio's acquisition of such security or other
asset. Accordingly, any later increase or decrease in a percentage resulting
from a change in values, net assets or other circumstances will not be
considered when determining whether that investment complies with the
Portfolio's investment policies and restrictions.
Additional investment restrictions specific to a particular portfolio are as
follows:
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<PAGE>
U.S. SHORT-TERM PORTFOLIO
U.S. Short-Term has adopted the following additional fundamental policy that may
not be changed without the approval of the holders of a majority of the shares
of the Portfolio. The Portfolio may not:
invest more than 5% of its total assets in the securities of any issuer
(other than securities issued by the U.S. Government, its agencies and
instrumentalities, and repurchase agreements), or purchase more than 10% of
the voting securities of any one issuer, with respect to 75% of the
Portfolio's assets.
U.S. Short-Term has also adopted the following non-fundamental policy that may
be changed by the Board of Directors without the approval of a majority of the
shares of the Portfolio. The Portfolio may not:
enter into repurchase agreements if, as a result thereof, more than 25% of
its total assets would be subject to repurchase agreements.
WORLDWIDE AND WORLDWIDE-HEDGED PORTFOLIOS
Worldwide and Worldwide-Hedged each has adopted the following fundamental policy
that may not be changed without the approval of the holders of a majority of the
shares of either Portfolio. Each Portfolio may not:
purchase or sell physical commodities or related commodity contracts.
Worldwide and Worldwide-Hedged each has also adopted the following
non-fundamental policy that may be changed by the Board of Directors without the
approval of a majority of the shares of the Portfolio. The Portfolio may not:
enter into repurchase agreements if, as a result thereof, more than 25% of
its total assets would be subject to repurchase agreements.
EMERGING MARKETS PORTFOLIO
Emerging Markets Portfolio has adopted the following fundamental policies that
may not be changed without the approval of the holders of a majority of the
outstanding voting securities of the Portfolio. The Portfolio may not:
a. borrow money, except by engaging in reverse repurchase agreements (reverse
repurchase agreements and dollar roll transactions that are covered
pursuant to SEC regulations or staff positions, will not be considered
borrowing) or dollar roll transactions or from a bank as a temporary
measure for the reasons enumerated in "INVESTMENT RESTRICTIONS" provided
that the Portfolio will not borrow, more than an amount equal to one-third
of the value of its assets, nor will it borrow for leveraging purposes
(i.e., the Portfolio will not purchase securities while temporary bank
borrowings in excess of 5% of its total assets are outstanding);
b. issue senior securities (other than as specified in clause a);
c. underwrite securities of other issuers;
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<PAGE>
d. purchase securities on margin (although deposits referred to as "margin"
will be made in connection with investments in futures contracts, as
explained above, and the Portfolio may obtain such short-term credits as
may be necessary for the clearance of purchases and sales of securities);
e. make short sales of securities (does not include options, futures, options
on futures or forward currency contracts);
f. purchase or sell real estate (other than marketable securities representing
interests in, or backed by, real estate); or
g. purchase or sell physical commodities or related commodity contracts.
h. invest more than 25% of its total assets in the securities of issuers in any
industry (other than U.S. Government Securities, the banking industry and
the finance industry). For purposes of this test, finance will be deemed to
include all asset-backed securities.
i. make loans to other persons, except by:
i. the purchase of a portion of an issue of debt obligations in which a
Portfolio is authorized to invest in accordance with its investment
objectives, and
ii. engaging in repurchase agreements.
Emerging Markets Portfolio has also adopted the following non-fundamental
policies that may be changed by the Board of Directors without the approval of
the holders of a majority of the shares of the Portfolio. The Portfolio may not:
a. invest in companies for the purpose of exercising control or management;
b. purchase or retain the securities of any issuer if the officers, directors
or trustees of the Fund, or its advisors, or managers own beneficially more
than one half of one percent of the securities of an issuer, or together
own beneficially more than five percent of the securities of that issuer;
c. invest more than fifteen percent (15%) of the Fund's total assets in the
securities of issuers which, together with any predecessors have a record
of less than three years continuous operation or securities of issuers
which are restricted as to disposition.
INTERNATIONAL AND LIMITED DURATION PORTFOLIOS
International and Limited Duration Portfolios each have adopted the following
fundamental policies that may not be changed without the approval of the holders
of a majority of the outstanding voting securities of either Portfolio.
Each Portfolio may not:
a. borrow money, except by engaging in reverse repurchase agreements (reverse
repurchase agreements and dollar roll transactions that are covered
pursuant to SEC regulations or staff positions, will not be considered
borrowing) or dollar roll transactions or from a bank as a temporary
measure for the reasons enumerated in "INVESTMENT RESTRICTIONS" provided
that a Portfolio will not borrow, more than an amount equal to one-third of
the value of its assets, nor will it borrow for leveraging purposes (i.e.,
a Portfolio will not purchase securities while temporary bank borrowings in
excess of 5% of its total assets are outstanding);
b. issue senior securities (other than as specified in clause a);
c. purchase securities on margin (although deposits referred to as "margin"
will be made in connection with investments in futures contracts, as
explained above, and a Portfolio may obtain such short-term credits as may
be necessary for the clearance of purchases and sales of securities);
d. make short sales of securities (does not include options, futures, options
on futures or forward currency contracts);
e. underwrite securities of other issuers;
f. invest in companies for the purpose of exercising control or management;
g. purchase or sell real estate (other than marketable securities representing
interests in, or backed by, real estate); or
h. purchase or sell physical commodities or related commodity contracts.
i. purchasing or retaining securities of any issuer if the officers, directors
or trustees of the Fund, or its advisors, or managers own beneficially more
than one half of one percent of the securities of an issuer, or together
own beneficially more than five percent of the securities of that issuer;
and
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<PAGE>
j. the investment of more than fifteen percent (15%) of the Fund's total
assets in the securities of issuers which together with any predecessors
have a record of less than three years continuous operation or securities
of issuers which are restricted as to disposition.
k. invest more than 25% of its total assets in the securities of issuers in any
industry (other than U.S. Government Securities, the banking industry and
the finance industry). For purposes of this test, finance will be deemed to
include all asset-backed securities.
l. make loans to other persons, except by:
i. the purchase of a portion of an issue of debt obligations in which a
Portfolio is authorized to invest in accordance with its investment
objectives, and
ii. engaging in repurchase agreements.
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ILLIQUID SECURITIES
The SEC's staff has taken the position that purchased OTC options and the assets
used as cover for written OTC options are illiquid securities. Therefore, each
Portfolio has adopted an investment policy regarding the purchase or sale of OTC
options. The purchase or sale of an OTC option will be restricted if:
a. the total market value of the Portfolio's outstanding OTC options exceed 15%
of the Portfolio's net assets, taken at market value, together with all
other assets of the Portfolio that are illiquid or are not otherwise
readily marketable;
b. the market value of the underlying securities covered by OTC call options
currently outstanding that were sold by such Portfolio exceed 15% of the
net assets of such Portfolio, taken at market value, together with all
other assets of the Portfolio that are illiquid or are not otherwise
readily marketable; and
c. margin deposits on such Portfolio's existing OTC options on futures
contracts exceed 15% of the net assets of such Portfolio, taken at
market value, together with all other assets of the Portfolio that
are illiquid or are not otherwise readily marketable.
This policy is not fundamental to Portfolio operations and the Fund's Directors
may amended it without the approval of the Fund's or a Portfolio's shareholders.
However, the Fund will not change or modify this policy prior to a change or
modification by the SEC's staff of its position.
PORTFOLIO TRANSACTIONS
The Portfolios' debt securities are primarily traded in the over-the-counter
market by dealers who are usually acting as principal for their own account. On
occasion, securities may be purchased directly from the issuer. Such securities
are generally traded on a net basis and do not normally involve brokerage
commissions or transfer taxes. The Fund enters into financial futures and
options contracts normally involving brokerage commissions.
For the last three fiscal years, the amount of brokerage commissions (associated
with financial futures and options contracts) paid by each Portfolio were as
follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
PORTFOLIO NAME 1999 1998 1997
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Short-Term $148,225 $139,225 $126,108
Limited Duration 12,945 3,587 3,649
Mortgage-Backed 188,251 221,300 463,651
Global Tactical Exposure 180,920 239,523 127,213
Worldwide 37,653 28,336 21,065
Worldwide-Hedged 61,904 54,965 11,724
International 26,178 34,107 13,040
International Opportunities* 6,607 305 N/A
Emerging Markets** 16,399 32,923 7,697
</TABLE>
* Commenced operations October 8, 1998.
** Commenced operations on August 12, 1997.
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<PAGE>
The cost of executing transactions will consist primarily of dealer spreads.
These spreads are not included in Portfolio expenses and therefore, are not
subject to the expense cap. Nevertheless, incurring this spread, ignoring the
other intended positive effects of each such transaction, will decrease the
total return of the Portfolio. A Portfolio will buy one asset and sell another
only if the Investment Adviser and/or the Sub-Adviser believes it is
advantageous to do so after considering the effect of the additional custodial
charges and the spread on the Portfolio's total return.
All purchases and sales will be executed with major dealers and banks on a best
net price basis. No trades will be executed with the Investment Adviser, the
Sub-Adviser, their affiliates, officers or employees acting as principal or
agent for others, although such entities and persons may be trading
contemporaneously in the same or similar securities. The Investment Adviser
and/or Sub-Adviser may decide that a particular investment, which is appropriate
for one Portfolio, is considered for purchase for the account of another
Portfolio, client or fund. If this occurs, the investment opportunity, as well
as the expenses incurred in the transaction, will be allocated in a manner
deemed equitable by the Investment Adviser.
Certain Portfolios are expected to invest substantial portions of their assets
in foreign securities. Since costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in
domestic securities, the operating expense ratios of these Portfolios can be
expected to be higher than that of an investment company investing exclusively
in domestic securities.
SECURITIES VALUATION
Securities for which market quotations are readily available are valued at
prices, which, in the opinion of the Investment Adviser, most nearly represent
the market values of such securities. Currently, such prices are determined
using the last reported sale price, or if no sales are reported (as in the case
of some securities traded over-the-counter), the last reported bid price, except
that certain securities are valued at the mean between the last reported bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are valued at amortized cost, which approximates market value. All other
securities and assets are value at their fair value following procedures
approved by the Directors. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares outstanding for each
Portfolio.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes and certain foreign securities. These
investments are valued at fair value on the basis of valuations furnished by
pricing services, which determine valuations for normal, institutional-size
trading units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by the Portfolios are restricted as to resale, the
Investment Adviser determines their fair value following procedures approved by
the Directors. The fair value of such securities is generally determined as the
amount that a Portfolio could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Portfolio in connection with such
disposition).
Generally, trading in securities (such as foreign securities) is substantially
completed each day at various times prior to the close of the Exchange. The
values of these securities used in determining the net asset value of a
Portfolio's shares are computed as of such times. Also, because of the amount of
time required to collect and process trading information as to large numbers of
securities, the values of certain securities (such as convertible bonds, U.S.
government securities, and tax-exempt securities) are determined based on market
quotations collected earlier in the day at the latest practicable time prior to
the close of the Exchange. Occasionally, events affecting the value of
securities may occur between such times and the close of the Exchange, which
will not be reflected in the computation of a Portfolio's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value following
procedures approved by the Directors. In addition, securities held by some of
the Portfolios may be
37
<PAGE>
traded in foreign markets that are open for business on days that a Portfolio is
not, and the trading of such securities on those days may have an impact on the
value of a shareholder's investment at a time when the shareholder cannot buy
and sell shares of such Portfolio.
The Money Market Portfolio generally values its portfolio securities at
amortized cost according to Rule 2a-7 under the Investment Company Act of 1940,
as amended.
SUPPLEMENTAL TAX CONSIDERATIONS
The following summary of tax consequences does not purport to be complete. It is
based on U.S. federal tax laws and regulations in effect on the date of this
SAI, which are subject to change by legislative or administrative action. Each
investor is advised to consult their own tax advisor for more complete
information on specific tax consequences.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each active Portfolio has qualified, and intends to continue to qualify, to
be treated as a regulated investment company ("RIC") under Sub chapter M of
the Internal Revenue Code of 1986, as amended (the "Tax CODE"). To qualify as
a RIC, a Portfolio must, among other things:
a. derive at least 90% of its gross income each taxable year, from dividends,
interest, payments (with respect to securities loans and gains from the
sale or other disposition of securities or foreign currencies) or other
income (including gains from options, futures or forward contracts) derived
from its business of investing in securities or foreign currencies (the
"QUALIFYING INCOME REQUIREMENT");
b. diversify its holdings so that, at the end of each quarter of the
Portfolio's taxable year:
i) at least 50% of the Portfolio's asset market value is represented by
cash and cash items (including receivables), U.S. Government
Securities, securities of other RICs and other securities, with such
other securities of any one issuer limited to an amount not greater
than 5% of the value of the Portfolio's total assets and not greater
than 10% of the outstanding voting securities of such issuer and
ii) not more than 25% of the value of the Portfolio's total assets is
invested in the securities of any one issuer (other than U.S.
Government Securities or the securities of other RICs); and
c. distribute at least 90% of its investment company taxable income (which
includes, among other items, interest and net short-term capital gains in
excess of net long-term capital losses).
If a Portfolio does not qualify as a RIC for any taxable year, all of its
taxable income will be taxed to the Portfolio at corporate rates. For each
taxable year the Portfolio qualifies as a RIC, it will not be subject to federal
income tax on that part of its investment company taxable income and net capital
gains (the excess of net long-term capital gain over net short-term capital
loss) it distributes to its shareholders. In addition, to avoid a nondeductible
4% federal excise tax, the Portfolio must distribute during each calendar year
an amount at least equal to the sum of :
a. 98% of its ordinary income (not taking into account any capital gains or
losses), determined on a calendar year basis;
b. 98% of its capital gains in excess of capital losses, determined in general
on an October 31 year-end basis; and
c. any undistributed amounts from previous years.
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<PAGE>
Each Portfolio intends to distribute all of its net income and gains by
automatically reinvesting such income and gains in additional Portfolio shares.
Each Portfolio will monitor its compliance with all of the rules set forth in
the preceding paragraph.
39
<PAGE>
DISTRIBUTIONS
The following qualifies as taxable income to Portfolio shareholders:
a. Portfolio's automatic reinvestment of its ordinary income,
b. net short-term capital gains and net long-term capital gains in additional
Portfolio shares, and
c. distribution of such shares to shareholders.
Generally, shareholders will be treated as if the Portfolio had distributed
income and gains to them and then reinvested by them in Portfolio shares--even
though no cash distributions have been made to shareholders. The automatic
reinvestment of ordinary income and net realized short-term Portfolio capital
gains would be taxable to shareholders as ordinary income. Each Portfolio's
automatic reinvestment of any net long-term capital gains DESIGNATED as capital
gain dividends by the Portfolio will be taxable to the shareholders as long-term
capital gain. This is the case regardless of how long they have held their
shares. None of the amounts treated as distributed to a Portfolio's shareholders
will be eligible for the corporate dividends received deduction. A distribution
will be treated as paid on December 31 of the current calendar year, if the
Portfolio:
a. declares it during October, November or December, and
b. the distribution has a record date in such a month, and
c. it is paid by the Portfolio during January of the following calendar year.
Such distributions will be taxable to shareholders in the calendar year in
which the distributions are declared, rather than in the calendar year in
which the distributions are received. Each Portfolio will inform
shareholders of the amount and tax status of all amounts treated as
distributed to them not later than 60 days after the close of each calendar
year.
SALE OF SHARES
Upon the sale or other disposition of Portfolio shares, or upon receipt of a
distribution in complete Portfolio liquidation, a shareholder usually will
realize a capital gain or loss (assuming the shareholder holds the shares as
a capital asset). This loss may be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. For tax
purposes, a loss will be disallowed on the sale or exchange of shares if the
disposed of shares are replaced (including shares acquired pursuant to a
dividend reinvestment plan) within a period of 61 days. The 61 day time
window begins 30 days before and ends 30 days after the sale or exchange of
such shares. Should a disposition fall within this 61-day window, the basis
of the acquired shares will be adjusted to reflect the disallowed loss. If a
shareholder holds Portfolio shares for six months or less and during that
period receives a distribution payable of long-term capital gain, any loss
realized on the sale of such shares during such six month period would be a
long-term loss to the extent of such distribution.
ZERO COUPON SECURITIES
A Portfolio's investment in zero coupon securities will result in Portfolio
income, equal to a portion of the excess of the stated redemption price of
the securities over their adjusted issue price (the "ORIGINAL ISSUE
DISCOUNT"), prior amortized value or purchased cost for each year that the
securities are held. This is so, even though the Portfolio receives no cash
interest payments during the holding period. This income is included when
determining the amount of income the Portfolio must distribute to maintain
its status as a RIC and to avoid the payment of Federal income tax and the 4%
excise tax.
HEDGING TRANSACTIONS
Certain options, futures and forward contracts in which a Portfolio may invest
are "section 1256 contracts." Gains and losses on section 1256 contracts are
generally treated as 60 percent long-term and 40 percent short-term capital
gains or losses ("60/40 TREATMENT"). This is so, regardless of the length of the
Portfolio's actual holding period for the contract. Also, a Portfolio holding a
section 1256 contract at the end of each taxable year (and generally, for the
purposes of the 4% excise tax, on October 31 of each year) must be treated as if
the contract had been sold at its fair market value on that day ("MARK TO MARKET
TREATMENT"). As such, any deemed gain or loss on the contract is subject to
60/40 treatment. Foreign currency gain or loss (discussed below) arising from
section 1256 contracts may, however, be treated as ordinary income or loss.
STRADDLES
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<PAGE>
The hedging transactions undertaken by a Portfolio may result in "straddles" for
federal income tax purposes, affecting the character of gains or losses realized
by the Portfolio. Losses realized by a Portfolio on positions that are part of a
straddle may be deferred under the straddle rules rather than being taken into
account in calculating the taxable income for the taxable year in which such
losses are realized. Further, a Portfolio may be required to capitalize, instead
of currently deducting any interest expense on indebtedness incurred or
continued to purchase or carry any positions that are part of a straddle. To
date, only a few regulations implementing the straddle rules have been executed;
thus, the Portfolio tax consequences of engaging in straddles transactions are
unclear. Hedging transactions may increase the amount of short-term capital gain
realized by the Portfolios. Such gain is taxed as ordinary income when
distributed to shareholders.
A Portfolio may make one or more of the elections available under the Tax Code
that is applicable to straddles. If a Portfolio makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
accelerate the recognition of gains or losses from the affected straddle
positions.
Straddle rules may affect the amount, character and timing of gains or losses
from the positions that are part of a straddle. The amount of Portfolio income
distributed and taxed as ordinary income or long-term capital gain to
shareholders may be increased or decreased compared to a fund not engaging in
such hedging transactions.
FOREIGN CURRENCY-RELATED TRANSACTIONS
Gains or losses attributable to exchange rate fluctuations are generally treated
as ordinary income or ordinary loss when they occur between the time a Portfolio
accrues interest or other receivables, accrues expenses or other liabilities,
denominated in a foreign currency and the time the Portfolio actually collects
such receivables, or pays such liabilities. In addition, gains or losses may be
the result of:
a. certain option dispositions
b. futures and forward contracts
c. debt security dispositions denominated in a foreign currency
d. fluctuations in foreign currency value between the date of acquisition of
the security or contract and the date of disposition.
These gains or losses, referred to under the Tax Code as "section 988" gains or
losses, may increase or decrease the amount of a Portfolio's investment company
taxable income to be distributed to shareholders as ordinary income.
BACKUP WITHHOLDING
A Portfolio may be required to withhold U.S. Federal income tax at the rate of
31% of all amounts deemed to be distributed as a result of the automatic
reinvestment by the Portfolio of its income and gains in additional shares of
the Portfolio. The 31% rate applies to shareholders receiving redemption
payments whom:
a. fail to provide the Portfolio with their correct taxpayer identification
number;
b. fail to make required certifications,
c. have been notified by the Internal Revenue Service that they are subject to
backup withholding.
Backup withholding is not an additional tax. Any amounts withheld will be
credited against a shareholder's U.S. Federal income tax liability. Corporate
shareholders and certain other shareholders are exempt from such backup
withholding.
FOREIGN SHAREHOLDERS
A foreign shareholder, qualifying as a non-resident alien, a foreign trust or
estate, foreign corporation, or foreign partnership ("FOREIGN SHAREHOLDER") may
have to pay U.S. tax depending on whether the Portfolio income is "effectively
connected" with a U.S. trade or business.
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<PAGE>
If a foreign shareholder's Portfolio income is not "effectively connected" with
a U.S. trade or business, the distributions of investment company taxable income
will be subject to a U.S. tax of 30% (or lower treaty rate).
If a foreign shareholder's Portfolio income is effectively connected with an
U.S. trade or business, then:
a. distributions of investment company taxable income,
b. capital gain dividends, and
c. any gain realized upon the redemption, sale or exchange of shares of the
Portfolio will be subject to U.S. Federal income tax at the graduated rates
applicable to U.S. citizens or domestic corporations. Such shareholders may
also be subject to the branch profits tax at a 30% rate.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may differ from those described herein. Foreign
shareholders are advised to consult their own tax advisers regarding investment
tax consequences in a Portfolio.
SHORT SALES
Subject to the rules concerning constructive sales (see below), each of
certain Portfolios will not realize gain or loss on the short sale of a
security until it closes the transaction by delivering the borrowed security
to the lender. Pursuant to Tax Code Section 1233, all or a portion of any
gain arising from a short sale may be treated as short-term capital gain,
regardless of the period of time the Portfolio held the security used to
close the short sale. The distribution requirements applicable to the
Portfolio's assets may limit the extent to which each Portfolio will be able
to engage in short sales and transactions in options, futures and forward
contracts.
CONSTRUCTIVE SALES
Under normal circumstances, a Portfolio may recognize gain from a
constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated
position. In that event, the Portfolio would be treated as if it had sold and
immediately repurchased the property and would be taxed on any gain (but not
loss) from the constructive sale. The character of gain from a constructive
sale would depend upon the Portfolio's holding period in the property. Loss
from a constructive sale would be recognized when the property was
subsequently disposed of, and its character would depend on the Portfolio's
holding period and the application of various loss deferral provisions of the
Tax Code. Constructive sale treatment does not apply to transactions closed
in the 90-day period ending with the 30th day after the close of the taxable
year, if certain conditions are met.
FOREIGN INCOME
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. The amount of foreign tax cannot be predicted in advance
because the amount of a Portfolio's assets that may be invested in a particular
country is subject to change.
Certain Portfolios may invest in shares of foreign corporations that may be
classified under the Tax Code as passive foreign investment companies ("PFICs").
In general, a foreign corporation is classified as a PFIC if at least one-half
of its assets constitute investment-type assets, or 75% or more of its gross
income is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to shareholders. In general, under PFIC rules,
an excess distribution is treated as having been realized ratably over the
period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
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<PAGE>
A Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, a
Fund would be required to include in its gross income its shares of the earnings
of a PFIC on a current basis, regardless of whether distributions were received
from the PFIC in a given year. If this election were made, the special rules,
discussed above, relating to the taxation of excess distributions would not
apply. In addition, another election would involve marking to market a Fund's
PFIC shares at the end of each taxable year, with the result that unrealized
gains would be treated as though they were realized and reported as ordinary
income. Any mark-to-market losses and any loss from an actual disposition of
PFIC shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years.
If more than 50% of a Portfolio's total asset value at the end of its taxable
year consists of securities of foreign corporations as will be expected with
respect to the International Portfolios, the Portfolio will be eligible, and may
elect to "pass through" to shareholders the Portfolio's foreign income and
similar taxes it has paid. Pursuant to this election, a shareholder will be
required to include in gross income (in addition to taxable dividends actually
received) a pro rata share of the foreign taxes paid by the Portfolio in gross
income. The Portfolio will be entitled either to deduct (as an itemized
deduction) that amount in computing taxable income or use that amount as a
foreign tax credit against U.S. Federal income tax liability. The amount of
foreign taxes for which a shareholder can claim a credit in any year will be
subject to limitations set forth in the Tax Code, including a separate
limitation for "passive income," which includes, among other items, dividends,
interest and certain foreign currency gains. Shareholders not subject to U.S.
Federal income tax on portfolio income may not claim this deduction or credit.
International Portfolio shareholders will be notified within 60 days after the
close of the Portfolio's taxable year whether the foreign taxes paid by such
Portfolio will "pass through" for the year.
OTHER TAXES
A Portfolio may be subject to state, local or foreign taxes in any jurisdiction
where the Portfolio is deemed to be doing business. In addition, Portfolio
shareholders may be subject to state, local or foreign taxes on Portfolio
distributions. In many states, Portfolio distributions derived from interest on
certain U.S. Government obligations may be exempt from taxation. Shareholders
should consult their own tax advisers concerning these matters.
SHAREHOLDER INFORMATION
Certificates representing a particular Portfolio's shares will not be issued to
shareholders. Investors Bank, the Fund's Transfer Agent, maintains accounts for
each shareholder. The registration and transfer of shares, as recorded in these
accounts shall be reflected by bookkeeping entry, without physical delivery.
Detailed confirmations of purchase or redemption are sent to each shareholder.
Monthly account statements are sent detailing which shares were purchased as a
result of a reinvestment of Portfolio distributions.
The Transfer Agent will require a shareholder to provide requests in writing,
accompanied by a valid signature guarantee form, when changing certain
information in an accounts (i.e., wiring instructions, telephone privileges,
etc.) Neither of the Fund, First Fund or the Transfer Agent will be responsible
for the validity of written or telephonic requests.
Should conditions exist making cash payments undesirable, the Fund reserves the
right to honor any Portfolio redemption request by making whole or part payment
in readily marketable securities and valued as they are for purposes of
computing the Portfolio's net asset value (redemption-in-kind). If payment is
made in securities, a shareholder may incur transaction expenses in converting
these securities to cash. The Fund has elected to be governed by Rule 18f-1
under the 1940 Act. Thus, the Fund is obligated to redeem shares, with respect
to any one shareholder during any 90-day period, solely in cash up to the lesser
of $250,000 or 1% of the net asset value of a Portfolio at the beginning of the
period.
CALCULATION OF PERFORMANCE DATA
From time to time, Portfolios may include their yield and total return in
reports to shareholders or prospective investors. Quotations of a Portfolio's
yield are based on all investment income per share during a particular 30-day
(or one month) period, (including dividends and interest); less expenses accrued
during the period ("Net investment income"). Such quotations are computed by
dividing net investment income by the maximum offering price per share on the
last day of the period, according to the following formula, which is prescribed
by the SEC:
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6
Yield = 2 [(a - b + 1) - 1]
-----
cd
Where:
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Shares of a Portfolio outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period.
The yield as defined above for each relevant Portfolio for the 30-day period
ended December 31, 1999 is as follows:
<TABLE>
<S> <C>
U.S. Short-Term................. 5.45%
Limited Duration................ 5.94%
Worldwide....................... 5.65%
Worldwide-Hedged................ 5.45%
International................... 4.24%
Emerging Markets................ 4.95%
</TABLE>
Yield is calculated by first determining the net change over a 7-calendar day
period, exclusive of capital changes, in the value of a hypothetical preexisting
account having a balance of one share at the beginning of the period. This
number is then divided by the value of the account at the beginning of the base
period, to obtain the base period return. The yield is annualized by multiplying
the base period return by 365/7. The yield is stated to the nearest hundredth of
one percent. The effective yield is calculated by the same method as yield
except that the base period return is compounded by adding 1, raising the sum to
a power equal to 365/7, and subtracting 1 from the result, according to the
following formula:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
Average annual total return quotes will be expressed as the average annual
compounded rate of return of a hypothetical investment in a Portfolio over 1, 5
and 10 years (up to the life of the Portfolio). This will be calculated pursuant
to the following formula, prescribed by the SEC:
n
P (1 + T) = ERV
Where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
All total return figures assume that all dividends are reinvested when
paid.
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The total return as defined above, for each Portfolio (annualized) for the one,
five and ten year periods, and life of the Portfolio, ended December 31, 1999,
is as follows:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS TEN YEARS LIFE OF PORTFOLIO INCEPTION DATE
<S> <C> <C> <C> <C> <C>
U.S. Short-Term 4.26% 5.22% 5.10% 5.12% 12/6/89
Limited Duration 2.88% 6.64% N/A 5.46% 7/26/93
Mortgage-Backed 1.21% N/A N/A 6.87% 4/29/96
Global Tactical Exposure* 2.90% N/A N/A 6.24% 9/14/95
Worldwide (5.38%) 6.03% N/A 6.82% 4/15/92
Worldwide-Hedged (0.19%) 8.88% N/A 9.32% 5/19/92
International (6.34%) N/A N/A 4.58% 5/9/96
Emerging Markets 11.73% N/A N/A (0.51%) 8/12/97
</TABLE>
* The Portfolio redeemed all of its assets on December 30, 1994, and began
selling shares again on September 14, 1995. The total return (on an annualized
basis) from its original inception of March 25, 1993 through December 30, 1994,
was 5.39%.
CONTROL PERSON
As of April 1, 2000, Fischer Francis Trees & Watts, Inc., had discretionary
investment advisory agreements with shareholders of the Registrant, representing
65.37% of the Registrant's total net assets and therefore may be deemed to be a
"control person" of the Registrant as such term is defined in the 1940 Act.
CUSTODIAN AND ACCOUNTING AGENT
Investors Bank & Trust Company, P.O. Box 9130, Boston, Massachusetts 02117-9130,
is Custodian and Accounting Agent for the Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, P.O. Box 9130, Boston, Massachusetts 02117-9130,
is Transfer Agent for the shares of the Fund, and Dividend Disbursing Agent for
the Fund.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, NW, Washington, D.C. 20006-2401, is
legal counsel for the Fund.
INDEPENDENT AUDITORS
KPMG LLP, 345 Park Avenue, New York, New York 10154, is the independent auditor
for the Fund.
FINANCIAL STATEMENTS
The audited financial statements for the year ended December 31, 1999 are
incorporated herein by reference to the Annual Report to shareholders covering
this period. A copy has been delivered with this SAI.
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<PAGE>
QUALITY RATING DESCRIPTIONS
STANDARD & POOR'S CORPORATION
AAA. Bonds rated AAA are the highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA. Bonds rated AA also qualify as high-quality obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances,
they differ from AAA issues only in a small degree.
A. Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances
and economic conditions.
BBB. Bonds rated BBB are regarded as having adequate capacity to pay interest or
principal. Although these bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and principal.
BB. Bonds rated BB are less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B. Bonds rated B are more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
CCC. Bonds rated CCC are currently vulnerable to nonpayment, and are dependent
upon favorable business, financial, and economic conditions for the obligor
to meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
CC. Bonds rated CC are currently highly vulnerable to nonpayment.
C. Bonds rated C may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
The ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Municipal notes issued since July 29, 1984 are designated "SP-1," "SP-2," and
"SP-3." The designation SP-1 indicates a very strong capacity to pay principal
and interest. A "+" is added to those issues determined to possess overwhelming
safety characteristics.
A-1. S&P's Commercial Paper ratings are current assessments of the likelihood of
timely payments of debts having original maturity of no more than 365 days. The
A-1 designation indicates the degree of safety regarding timely payment is very
strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3. Adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment on
the obligation.
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<PAGE>
MOODY'S INVESTORS SERVICE, INC.
Aaa. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. These bonds are judged to be of high quality by all standards. Together with
the Aaa group they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities, fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than the Aaa securities.
A. These bonds possess many favorable investment attributes and may be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. These bonds are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba. These bonds possess speculative elements because their future cannot be
considered as well assured. Uncertainty of position characterizes bonds in this
class, because the protection of interest and principal payments may be very
moderate and not well safeguarded.
B. These bonds lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa. This rating represents bonds, which may be in default, or, there may be
present elements of danger with respect to principal or interest.
Ca. This rating represents highly speculative bonds. Such instruments are often
in default or have other marked shortcomings.
C. The lowest class of bonds, the prospects of attaining any real investment
standing are poor.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end or its generic rating
category.
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term credit risk.
Factors affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of high importance in long-term
borrowing risk are of lesser importance in the short run.
MIG-1. Notes bearing this rating are of the best quality enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2. Notes bearing this rating are of favorable quality, with all security
elements accounted for, but lacking the undeniable strength of the previous
grade. Market access for refinancing, in particular, is likely to be less well
established.
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<PAGE>
MIG-3. Notes bearing this rating are of favorable quality, although liquidity
and cash flow protection may be narrow, and market access for refinancing is
likely to be well established.
P-1. Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. The designation "Prime-1" or "P-1" indicates the highest
quality repayment capacity of the rated issue.
P-2. Issuers have a strong capacity for repayment of short-term promissory
obligations.
THOMSON BANKWATCH, INC.
A. Company possesses an exceptionally strong balance sheet and earnings record,
translating into an excellent reputation and unquestioned access to its natural
money markets. If weakness or vulnerability exists in any aspect of the
company's business, it is entirely mitigated by the strengths of the
organization.
A/B. Company is financially very solid with a favorable track record and no
readily apparent weakness. Its overall risk profile, while low, is not quite as
favorable as companies in the highest rating category.
A1. Short-term obligations rated A1 are supported by a very strong capacity for
timely repayment. A plus sign is added to those issues determined to possess the
highest capacity for timely payment.
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